US snack maker Lance is to merge with rival Snyder’s of Hanover to create what analysts expect will be a “formidable” company in the snack foods business.
The deal will combine the two firms in what they have called a “stock-for-stock merger of equals” to create a company called Snyder’s-Lance.
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The merger will also create a national distribution platform in the US, through which, both companies can, as one analyst put it, “cross-fertilise”.
Indeed, industry analysts in the US believe the transaction is a win-win for both firms.
Snyder’s is the number one pretzel manufacturer in the US but also offers tortilla chips and other salty snacks under various brand names. Lance, meanwhile, sells products including sandwich crackers, potato chips and cookies in the country.
“Combining [Snyder’s] brands with Lance’s namesake crackers and Cape Cod potato chips businesses clearly creates a much stronger company with national scale,” Scott Mushkin, Jefferies & Co analyst said. “Indeed, the combined company will be able to consolidate its Direct Store Delivery (DSD) networks helping drive cost synergies as well as drive incremental sales.”
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By GlobalDataThe move is no doubt welcome news for shareholders after Lance saw its net income tumble in the first three months of the year, which then forced the company to slash its earnings forecast for 2010. In a move to cut costs and boost margins, Lance then announced it was to cut 2% of its workforce.
Nonetheless, a more positive set of figures were released yesterday as the firm reported an increase in second-quarter profits.
Lance posted net income of $12.8m, against $9.8m a year earlier, and insisted it will remain focused on profitably growing the total business, while moving forward to finalise the merger.
Prior to the deal, Lance had done a laudable job in streamlining its business and improving operating performance, according to Mushkin.
However, he added: “It has been clear to us that its brand portfolio did not have the breadth or depth to drive significant incremental sales over its asset base. Combining with Snyder’s, we believe, solves this problem by adding quality brands and national distribution capabilities.”
Janney Montgomery Scott analyst Mitch Pinheiro was even more effusive, especially on the extra distribution strength of the combined companies.
“We absolutely think it’s a fantastic merger, it’s the proverbial ‘one plus one equals three’. The hardest thing for these companies to do is to grow and create new distribution routes. It’s extensive, it’s slow and this is instant national distribution, so it’s a win win for both companies,” he told just-food.
Just hours after the deal was announced, it was clear Lance already had its eye on growth opportunities.
In a conference call following the announcement of the merger yesterday, David Singer, president and CEO for Lance, and soon to be CEO of the newly-formed company, said the firm will focus on core brands for growth and, notably, on pursuing acquisition opportunities once the merger is complete.
The two “anchors” of Snyder’s-Lance, Singer said, will be Lance’s crackers and Snyder’s pretzels, which the company plans to support “aggressively” for top-line growth.
No surprise then, given that Snyder’s pretzels has a 40% share of the US pretzel market, nearly double that of PepsiCo’s Frito-Lay, which has a 23% share according to Pinheiro.
But it is Frito-Lay that dominates in the potato chips market, with a 62% share. The brand trumps Lance’s Cape Cod brand of chips, which holds a much smaller share of only 3%. Snyder’s is behind with a 2% share, which will put the combined company in the number three position in the potato chips market.
Maybe if Lance or Snyder’s had beaten Diamond Foods in the race for Kettle Foods, it might have improved its chances of closing the gap on Frito-Lay in the US potato chips market.
Both firms were reportedly two of a number of bidders for Kettle before Diamond Foods bought the business in February.
Nonetheless, Snyder’s-Lance will have a national distribution footprint and one of the largest (DSD) networks in the US on completion of the merger, which Mushkin believes will work in favour for the Cape Cod brand.
“Opportunity knocks for West Coast penetration of Cape Cod chips,” Mushkin said. “Given Snyder’s national footprint, we expect the company will be able to bring its strong Cape Cod potato chip franchise to the West Coast over the next few years. In addition, Snyder’s does have overseas distribution suggesting that there may be further opportunities to drive incremental revenues.”
However, Snyder’s has to consider a distribution agreement it has with Kettle and the risks this might bring for the merger.
“Snyder’s is a large distributor of Kettle Foods. And now Snyder’s will be distributing Cape Cod and Kettle chips,” Pinheiro said. “I think in the near term Snyder’s will be able to handle both but as we move beyond the near term I think Diamond will look perhaps to find another distributor.
“From Snyder’s point of view you make more money selling your own product, so it’s more profitable to sell Cape Cod chips than sell somebody else’s brand for them. So is it a risk? Sort of, but I don’t think it’s meaningful. They’ll replace it with other product,” Pinheiro added.
In yesterday’s conference call, despite brushing off potential issues with Kettle, Singer made it clear he was aware of the potential risks that a merger brings.
“They include issues associated with putting all synergies together, integrating companies, and there will be employees worried about what will happen,” Singer said. “We will need to make sure they know what is happening, but again we are focused on growth not shrinking so there will be a lot of opportunities for people.”
Nonetheless, the future is looking rosy for the two firms as they begin work on integrating the two companies. Mushkin, for one, raised his estimate on Lance for the year.
“We believe that the merger, which is slated to close in the fall, will be approved by shareholders and regulators,” Mushkin said.
“As such, we are issuing preliminary proforma EPS estimates of $1.51 next year, which does include some synergies from the merger. We have also raised our estimate for the year to $1.20 from $1.04 due to a better performance this quarter driven by good expense control which we expect to continue.”
