Distribution synergies and access to a wider better-for-you portfolio are two of the reasons industry experts have backed the move from Synder's-Lance for fellow US snacks group Diamond Foods. However, with Diamond having had a challenging few years financially, is the US$1.91bn cash-and-shares deal all Snyder's-Lance has made it out to be? Hannah Abdulla reports.
Snyder's-Lance yesterday (28 October) announced a US$1.91bn cash-and-stocks takeover deal for fellow US snacks group Diamond Foods, seemingly beating off interest from Kellogg, which was rumoured to be in late-stage talks with the Kettle Chips maker last week.
On an investor call discussing the deal in more detail, Carl Lee, president and CEO of Snyder's-Lance, touted what he saw as the benefits of the transaction.
"While both companies are good players in the overall snacking space, we really are very different in our profile and different in our consumer base and different in a lot of other ways," began Lee.
He pointed to how Snyder's is "pure-play in snacking", with its five core brands: Cape Cod, Snyder's of Hanover, Lance sandwich crackers, Pretzel Crisps and Late July.
Diamond, on the other hand, with its Kettle Chips brand has dealings in snacks, but also services the foodservice market with its Culinary Nuts brand. In addition, Diamond has what Lee described as "an even stronger better-for-you portfolio and better-for-you positioning and capabilities", something that appeared to be one of the key reasons Snyder's-Lance swooped for Diamond.
'Better-for-you' isn't an entirely new concept for Snyder's. Its Lance Sandwich Crackers are organic and non-GMO. Late July, in which Snyder's took an 80% stake in in November last year, is organic. The group also has some gluten-free offerings within its product portfolio.
In February, Snyder's-Lance launched Clearview Foods, a new division to focus on developing "better-for-you" products and grow the group's Snack Factory Pretzel Crisps, Eat Smart and Late July products.
Speaking to analysts yesterday Lee said Snyder's-Lance was seeing "significant growth" from better-for-you snacks.
Diamond, however, has a larger presence in the space, argued Lee. It is launching a non-GMO version of its Kettle Chips and is soon converting its Emerald nut line to non-GMO.
"It expands our better-for-you capabilities to really continue to address what consumers are looking for today as we leverage their innovation capabilities which are outstanding and also combined with ours, to continue to unlock some very important growth in the snacking categories," said Lee.
Lee said the presence Diamond has in the natural channel was a factor that had attracted the more mainstream-focused Snyder's-Lance.
"I'm really excited to be able to talk about non-GMO Kettle Chips and their all-natural positioning, really something that sets them apart and gives them a very important way to serve their consumers in the natural channels and in all the retailers that they are currently distributed in," Lee said. "The natural channel continues to grow and expand and that will be one area for us to continue to leverage the benefits of the two companies combined."
The Snyder's-Lance chief also sought to outline the cost synergies from the deal. As well as utilising a direct distribution model, the Kettle owner also uses third-party distributors to get its product on shelves across the US. Lee said the combined businesses could expect to achieve "significant savings" when it came to shipping and distribution, through unlocking of "warehouse efficiencies" where there was duplication, and less reliance on less-than-truckload, or LTL, shipments through fuller trucks.
"Combining best practices are going to allow us to be able to be much more efficient across our supply chain and in particular in procurement," said Lee.
Jonathan Feeney, principal at Athlos Research, pointed out a "tremendous amount of overlap as well as a big opportunity to distribute especially Kettle and some of the core Diamond snack products" through distribution already in place.
"Lance expects an enormous $75m in annual synergies, which would reduce the price paid to 8.5x EBITDA. We think this target is credible given the high distribution overlap. Assuming 4% financing costs and the new share count of 96.4 million, the new company looks to garner about $1.90 in EPS post-synergies, and slightly better on cash flow – which is roughly $0.50 accretive to the pre-deal level. Since the synergies are credible, we see the potential for significant upside in Lance shares.
One can see why savings of any sort would be attractive to Snyder's. While the firm posted an increase in net revenues of 1.8% for the third quarter yesterday, earnings per share of $0.26 missed analyst consensus by $0.07. Earnings before interest and tax fell to $25.1m from $26.5m on the back of higher cost of goods sold.
The deal also allows for Snyder's to venture into new territory. To start, it provides Snyder's with a stronger west coast presence thanks to plants in Salem, Orgeon and the Stockton, California plants. That gives Snyder's two additional manufacturing plants in the west coast, combined with its Arizona Goodyear plant. And then of course, the deal would also move Snyder's across the pond to the UK, where Diamond has a fully-fledged Kettle Chip operation which also services western Europe.
Despite the array of synergies, some investors have been reported to show uncertainty on just how good of a deal this is for Snyder's.
It is no secret that Diamond has struggled to rake in the sales in recent years and its balance sheet has been far from appealing. At the end of 2012 Diamond posted an annual loss of US$86.3m following an accounting scandal at the business. The month before, Diamond booked a loss for the first three quarters of the year and posted lower profits for 2010 and 2011. It had to refile results for those years after it found it had incorrectly accounted for payments to walnut growers, which led to the departure of its CEO and CFO.
In its full year fiscal 2014 results, losses grew progressively narrower over the course of the year. While full-year income was down, Diamond was able to report an improvement through the period, with fourth-quarter losses narrowing to $1.8m from $143.7m.
"Diamond’s business has been uninspired for several years," said Asit Sharma, an analyst at the Motley Fool in a report carried by Bloomberg. "Even though the brand pieces may fit together, it’s hard to feel energised about this deal if you’re a Snyder’s-Lance shareholder."
But Brett Hundley, CFA, BB&T Capital Markets backed the deal and added he had "faith in management's ability to execute the combination."
"Our most pronounced concerns would be the global macro and/or drought in CA. We think that Lance has been evaluating Diamond for some time, and we think that Lance has a number of tools to close the deal. We have long desired a tie-up between the two, as the combined entity should be able to drive solid cost synergies related to procurement, operation and distribution, alongside sizeable revenue synergies, that latter of which are currently not factored in."
Feeney agrees, but nods to the "high price tag" that could be a concern on some investors' minds.
"Despite the apparently high price tag, we like this deal. With Diamond, Lance is now by far the leading consolidator of any salty snack not made in Plano, and that's a huge consideration. The snacking parts of the portfolio are likely going to come in near GP levels of contribution margin as they'll be distributed at minimal cost," he said.
In terms of good future outlook, Feeney noted that since the deal was almost half financed with equity, Snyder's-Lance "has room to do future deals within 12 months."