Who could swoop for Diamond Foods?
Who will make a play for Diamond's stable of snack brands?
Diamond Foods side-stepped market talk it has put itself up for sale and even suggested it would be open to broadening its own portfolio during a conference call with analysts this week. However, this does not mean the US snacks group's management is closed to the idea of the company shopping itself. Katy Askew takes a look at the possibility of a deal and who could be interested in a punt for the Kettle Chips maker.
Speculation Diamond Foods has placed itself on the block has reached fever pitch in recent weeks. According to one report, from Deal Reporter, Diamond has been trying to find a buyer with the help of Credit Suisse. Discussions, which started as informal conversations, have purportedly continued for the past year.
Speaking during a conference call to discuss its full-year results late Tuesday (29 September), management cast Diamond as the hunter rather than the hunted. The company, which booked essentially flat sales as a drop in revenue from its low-margin nut business offset growth in snacks, wants to expand its value-added revenue stream, chief executive Brian Driscoll indicated.
"We think that our portfolio range needs to be expanded. We don't think we have the kind of range that's ideal for where we want to take the company over time," he explained.
In the pursuit of acquisitions, Diamond would "stick close" to its "centre of competence", which Driscoll defined as "convenient protein and snacks and salty snacks". In particular, the Kettle Chips maker is focused on expanding in the GMO-free space, the chief executive continued. "We've seen great success with our efforts on [GMO-free] Kettle. As you know, we feel really good about the response we’re getting on the Emerald’s repositioning and transition. Retailers have embraced the non-GMO verification transition on Diamond. So we’re morphing our portfolio entirely there. We think we can build on that through acquisition in order to assist accelerating our growth profile."
Wells Fargo Secutiries analyst Bryan Hunt said, while Diamond's leverage currently stands at five times, EBITDA growth and free cash flow mean that leverage should "drop nicely in the upcoming fiscal year". Diamond chief financial officer Ray Silcock said the company cannot look at acquisitions of a size that would take leverage above 6.5 times, due to the group's debt covenants. "I think that's the point of making the right kind of acquisition that we would want to buy at a price point that where now the EBITDA would... not make our operating leverage significantly worse than it is today," he explained.
In today's competitive M&A market Diamond could find it difficult to identify a bargain that would provide its portfolio with the tweak that it is apparently looking for. If Diamond were to identify a transformational opportunity, the group would therefore need to look at changing its capital structure. "That would really probably involve selling stock or something to increase our equity or something like that," Silcock revealed. Otherwise, management is "confident" it will find something - "maybe something more modest in size that will fit the profile and will work for us, inside what we can afford to pay", Silcock continued.
Andrew Lazar, an analyst at Barclays Capital, suggested management's focus on bolt-on opportunities does not necessarily mean something more "strategic" is off the cards. Alluding to the buzz around a potential sale, Lazar wrote in an investor note: "Some investors may have hoped for additional clarity around potential strategic considerations and thus may be disappointed that management did not provide many specific details on the topic, other than to express its continued interest in pursuing bolt-on deals. Still, we do not think this limited commentary should be viewed as a surprise by investors or as likely to suggest Diamond would be uninterested in potential strategic opportunities."
BB&T Capital Markets' Brett Hundley concurs Diamond could be up for grabs and believes the tone adopted by management on the analyst call is suggestive of a company looking to appeal to any would-be-suitors. "Is Diamond for sale? Given a smorgasbord of buzzwords used during its earnings call, we seem to think so. Kettle as a 'millennial' brand - check; products to 'snack' on - check; transitioning towards a 'non-GMO' portfolio - check; first time we have heard 'protein' on its call – check!"
If Diamond were available, which companies are likely to take a look?
Kellogg seems an obvious choice. The company is struggling in North America where, although investment behind its brands is slowing negative sales trends, the result is weakening operating profit and lower return on investment. In particular, the company's cereal business has been hit by the double whammy of a declining category (due to shifting breakfast consumption patterns) at a time of increased competition from smaller brands appealing to shifting consumer trends. Kellogg's snacks portfolio, which includes the Pringles brand, is faring somewhat better. While US snacks are facing increased competitive activity – such as the rising popularity of brands like Kind snack bars – the category itself is fundamentally sound.
As Bernstein Research's Alexia Howard suggests: "Kellogg might want to scour domestic and international markets to build scale in snacks and leverage the US DSD system more effectively. Diamond Foods or a broader roll up of publicly-traded US snack companies (eg J&J Snack Foods, Snyder's-Lance if insider ownership issues can be overcome) might be a start."
Indeed, according to Howard, Diamond would be within Kellogg's reach. Even assuming a "lofty premium" and a deal value in the region of US$1.9bn the transaction could see Kellogg's shareholders come out on top. "The transaction could be neutral to Kellogg's EPS before synergies and ~4% ($0.16) accretive with cost synergies of 8.5% of Diamond Foods' revenues. And it might just help to get the top-line going again," Howard suggests.
PepsiCo is another US food major for which Diamond would represent a particularly good fit. The company is the world's largest salty snack maker and Diamond would complement its snacking portfolio in two of its largest markets – the US and UK. Indeed, after PepsiCo reported its first-half numbers in July, CEO Indra Nooyi insisted PepsiCo still has a lot of room to grow in snacks. In particular, PepsiCo continues to build on its salty snack base and expand its savoury snack portfolio to include numerous products, such as crackers, nuts and seeds. "There is a lot of opportunity there," Nooyi said. Diamond could provide the group with a quick step-up in the areas it has singled out for growth.
A US acquirer a little more out of left field could also emerge, in the form of Tyson Foods, Hundley suggested. "Tyson could package the nuts part of the portfolio with its other protein offerings in order to offer protein snacking to consumers,” he told just-food. “I think it also would like to incorporate other packaged snack products into its portfolio in order to diversify somewhat away from meat. Tyson is now able to look at acquisition targets again after paying down its debt associated with the Hillshire [Brands] purchase last year."
And of course, there is always the possibility that international investors could swoop for the US snack maker. Diamond could attract the likes of Turkey's Yildiz Holding, which has indicated it is eyeing further acquisitions and has even said that it wants to overtake Kellogg to become the world's second-largest snacks group.
Yildiz owns local confectioner Ülker and has expanded its snacking presence through M&A, including snapping up US chocolate business Godiva, and, more recently, pipping Kellogg to acquire UK-based biscuit maker United Biscuits. The firm has since further stepped up its presence in the food industry with the acquisition of shares in G2M, a foodservice company servicing events and institutions, from private-equity firm Actera Group. Yildiz's core business – of cookies and chocolates – would be neatly complemented by a stable of savoury snacking brands.
China's Bright Food is another international food maker pursuing an internationalisation strategy through acquisitions. Bright's strategy to invest in overseas companies focuses on acquiring high-quality brands with a sales presence – as well as quality assurance and management best practice – can then be imported back to China. Diamond's product line-up – which includes Pop Secret popcorn - could complement this ambition. According to research from Euromonitor International, China's packaged snacks sector remains in good health with popcorn emerging as a "star product".
To date, Bright's overseas investments include Italian olive oil maker Salov Group, UK cereal brand Weetabix and Israeli grocer Tnuva. In August the Chinese food giant moved to acquire Spanish wholesaler Miquel Alimentació.
Bright's European investment focus can be noted in its portfolio and the company has indicated Europe is its top investment priority. But perhaps Bright could follow in the footsteps of fellow Chinese food major WH Group – which became the world's largest pork processor through the acquisition of Smithfield Foods – and become a stakeholder in the US food sector.
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