TreeHouse paid 13x EBITDA for snacks arm in 2014

TreeHouse paid 13x EBITDA for snacks arm in 2014

TreeHouse Foods has sold its snacks arm for US$90m - a business the US private-label supplier bought for $860m five years ago. But Wall Street has welcomed the move. Dean Best reports.

US private-label manufacturer TreeHouse Foods this week executed another part of its plan to try to improve its performance, announcing the disposal of yet another asset.

And, even if the price TreeHouse got for its once-prized snacks assets may have raised eyebrows at first glance, the sale has pleased Wall Street.

On Monday, TreeHouse said it had offloaded its snacks business to private-equity firm for Atlas Holdings, agreeing a purchase price of US$90m. TreeHouse's snacks division employs 800 staff at three plants in North Carolina, Texas and Alabama. A fourth site, located in Minnesota and which makes the nuts and trail mixes for the division, is set to close by the end of the third quarter as previously announced in May. Overall, TreeHouse estimates the operations will generate sales of $670m in 2019.

The deal with Atlas was announced five years and a week after TreeHouse acquired what was then called Flagstone Foods from another private-equity firm, Gryphon Investors, for $860m.

"Flagstone Foods is ideally situated at the intersection of health and wellness, snacking and the perimeter of the store, and represents an attractive new platform for TreeHouse to enter the on-trend, rapidly growing $7.1bn healthy snacks category," then TreeHouse president and CEO Sam Reed said at the time.

The difference in what TreeHouse paid for the business in the summer of 2014 and what it recouped five years later doesn't make for happy reading, at first view.

However, it had been well flagged TreeHouse was looking to offload the business, with the company confirming the plan before Christmas. Back then, there was chatter in the market TreeHouse was likely to get much less for the assets than the company paid.

And the move is part of a programme of disposals, factory closures, job cuts and reductions to product ranges TreeHouse and CEO Steven Oakland is undertaking to try to streamline its operations in order to pay down debt and boost profits.

Oakland joined TreeHouse in early 2018 but the company's efforts pre-dated his arrival, with the business announcing in the summer of 2017 a restructuring programme - dubbed TreeHouse 2020 - to improve its profitability and, over the long-term, "accelerate" the growth of the business.

Since then, under Oakland's watch, the TreeHouse 2020 programme has continued, with factories closed and other assets sold, namely the McCann's Irish Oatmeal brand to local peer B&G Foods and its ready-to-eat cereal business to Post Holdings, another US-based manufacturer.

At Wells Fargo, a US investment bank covering TreeHouse Foods, analyst John Baumgartner echoed why the manufacturer had received the price it did for the unit. "A common refrain we're hearing from investors is disappointment with the size of the proceeds as TreeHouse acquired the business for $860m in 2014. The reality is this is a distressed business; first-quarter 2019 revenue was minus 30% year-on-year and EBIT margin was minus 7.8% (including losses for three consecutive quarters) and we model a fiscal year 2019 margin of -4.5%, versus 5% in 2016," Baumgartner said. "For perspective, Hain Celestial finalised its Pure Protein unit sale last week after a 16-month odyssey for 0.2x revenue; a similarly distressed asset with minus double-digit revenue and negative EBIT."

Amit Sharma, an analyst monitoring TreeHouse at US investment bank BMO Capital Markets, described the price agreed as "paltry" but said the sale was a "potential positive" for the rest of the business.

Sharma cautioned the price tag meant the disposal could be "dilutive" to TreeHouse's earnings per share, although he underlined how the recent performance of the snacks business had affected the company's overall performance.

"This news should be viewed positively as snacks has been a material drag on TreeHouse's operating performance. In fact, TreeHouse cut its 2019 EPS guidance of $2.35-$2.75 by $0.15-$0.25 due to worse-than-expected snacks divisional performance in the first quarter of 2019 and likely continued weakness in the second quarter of 2019," Sharma said this week.

He guided the market that the sale "could be modestly positive" to TreeHouse's earnings per share and free cash flow in 2020 if the company is able to take out "stranded costs" like G&A and amortisation, as well as see the benefits from lower working capital and capex.

Sharma added: "It should allow management, and investors, to focus even more intently on the tangible progress being made in the rest of the portfolio through operational turnaround more constructive pricing environment, improving sales mix, higher service levels, and lower spot-market freight usage."

And, in a note to clients, Credit Suisse research analyst Robert Moskow said TreeHouse had sold its "snack nuts for peanuts" but, in doing so, had set up "a sturdier base" for the rest of the business.

"We view TreeHouse's announcement that it will sell its snack nut business to Atlas Holdings as a positive step in its effort to reduce the complexity of its portfolio and improve its operational effectiveness. While the management team clearly did not get the price it expected when it put the business up for strategic review last year, we are glad to see the company exit it entirely rather than hold out hope for a turnaround or enter a joint venture," Moskow said. "The snack nuts business kept losing customers and it operated at a very thin margin due to its commoditised nature. It is time to cut bait."

Moskow said the disposal would "remove EBIT and EBITDA losses of $28M and $6M respectively, from the 2019 base on a pro-forma basis and allow management to focus on product lines where it has more competitive advantages".

After this disposal, left in the TreeHouse larder are baked goods like biscuits and crackers, beverages and "meal solutions" such as mac 'n' cheese, pickles and sauces.

M&A has been a significant part of TreeHouse's growth strategy since being spun off from US dairy giant Dean Foods 12 years ago but there's no question some deals have fared better than others.

Back in the summer of 2014, then chairman and CEO Reed, speaking after the announcement of the group's deal to buy Flagstone, talked up the prospects for the new asset, saying the "rapidly-growing, mega category" of healthy snacks had once been the "enclave of national brands only". He said Flagstone was growing at 24% a year and was the leading private-label player in a space when retailers are looking to build their own offerings.

Then TreeHouse CFO Dennis Riordan insisted the price the company paid was justified because of the opportunities Flagstone had to grow further. "It's a high-growth business and it is exactly in the on-trend category so the backwards multiple is going to sound a little rich but as we look at this on a going-forward basis, we think it's an excellent value and price to pay for a large, meaningful and growing business, especially in the perimeter of the store where the growth is."

Ultimately, the deal hasn't worked and TreeHouse now believes the snacks business is not part of the company's future. "The sale of the snacks division is a key step in optimising TreeHouse's overall product portfolio," Oakland said on Monday.