Glenboden M & A Originations

Diamond Foods of US needs to acquire in healthier snacks outside nuts

Priority Rating priority rating 2
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Origination Status FY profit forecast announcement, January 2009
Asset candidates include Glisten (UK), The Nut Company (Holland), Bakalland (Poland)
Buyer Diamond Foods Inc (USA), no.2 domestic packaged nuts producer
Seller public shareholders (Glisten); Pfeifer & Langen (The Nut Company), founders (Bakalland)
Buyer Rationale continued growth momentum through European expansion
Seller Rationale acceptable valuation, timing, margin pressures
NBs Diamond’s US market share is 6,5% in nut snacks (Emerald) and 25% in popcorn (Pop Secret)
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Diamond Foods has emerged from obscurity to be the fastest –growing packaged nuts producer in the US, and the no.2 player in that market after Kraft’s ‘Planters’. A walnut growers’ marketing co-operative in California, that went public in 2005, the group’s sales have tripled in the last decade. Its portfolio and sales channel diversification in 2008, however, suggest that Diamond is over-investing in the US market; overseas acquisitions could make more strategic and financial sense for the group. There are plenty of ‘better-for-you’ snack producers for it to acquire, in Europe alone.

Before 2004, Diamond was a sleepy producer of culinary walnuts and other nuts, with sales equally split between retail and non-retail customers. With the acquisition in that year of Emerald Snacks, and the subsequent purchase of Pop Secret in 2008, retail sales have jumped to 75% of the group’s total; snacks alone are to constitute 25-30% of total sales in FY 2009.

Overall, Diamond’s retail sales have booked a CAGR of over 20% in last five years, with the top line forecast to hit US$ 600 mln in FY 2009. At the same time, driven by the segment growth of retail and snacks, the group’s EBITDA has grown even more sharply, reaching 6% of sales in FY 2008; with the addition of the high-margin Pop Secret business, that margin should exceed 10% in 2009. So Diamond's non-organic growth potential is strengthening.

So far, we believe that Diamond is placing too much emphasis on further growth in its domestic market. Its US$ 190 mln cash acquisition of Pop Secret in 2008, from General Mills, has broadened the portfolio and generated growth, but microwave popcorn is a clear departure from the group’s mission of healthier snacking, as well as from selling more of its growers’ nut harvests.

Furthermore, in terms of sales channels, Diamond’s penetration rate already exceeds 80% of US supermarkets. The group is now pushing hard in other channels, like airlines and the non-scanning value channel; but is the ‘game worth the candle’ in terms of growth potential and profitability in those markets ? Does Diamond’s increased marketing spend get rewarded through them ?

In our view, given the trajectory of Diamond’s portfolio mix and business model in general, the group’s strategy should focus on foreign markets. Diamond is the biggest US exporter of walnuts to Europe and Pacific Rim, and its international division contributes 20% of total sales. The basis therefore exists for the group to expand more aggressively overseas, in particular through acquisition in Europe.

On top of sales momentum, Diamond has the balance sheet strength to justify further acquisitions. It’s true that the Pop Secret purchase left the group with US$ 200 mln in net debt in Q1 2009. However, with FY 2009 EBITDA set to double to over US$ 60 mln, the net debt multiple will still be modest; besides which, some companies are now cheap to buy.

What's more, Diamond's debt headroom is heightened by the quality of its EBITDA. The consumer trend to healthier snacking is on the group's side; plus half of Diamond’s branded sales are in culinary nuts, which are counter-cyclical when the consumer trades down to home preparation.

There is no shortage of acquisition candidates for Diamond across Europe, where the trend for healthier snacking is at least as strong as in the US. In the UK, Glisten is a fast-growing company, with a natural snacks division that includes the premium nuts brand Dormen. In Holland, The Nut Company is building a pan-European brand proposition, including the market leader in Germany, Ueltje. In Poland, Bakalland is the market leader in culinary nuts and dried fruit, and has a premiumisation trend.

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THIS LEAD'S VALUATION
Size (€ mln) 140
Sector savoury snacks
Asset Quality US no.2 branded Pop Secret
Seller large plc
Buyer mid-cap plc
P/S 2,0
P/Ebitda n/a
Type cash consideration
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