Post Holdings - Not Attractive After Dakota Growers Deal

| About: Post Holdings, (POST)

Shares of Post Holdings (NYSE:POST) spiked upwards on Monday following the news that the company has acquired Dakota Growers Pasta from Glencore Xstrata which is shedding assets to please anti-trust authorities.

While the deal seems fair, and occurs at a discount to Post's own valuation, the overall valuation of Post is a bit high. The incurred leverage, premium valuation and lack of dividends make me wary to invest.

I remain on the sidelines.

The Deal

Post Holdings announced that it will acquire Dakota Growers Pasta, from Viterra which is a fully-owned subsidiary of Glencore Xstrata (OTCPK:GLCNF). Post will pay $370 million in cash for the company, subject to working capital adjustments.

Dakota is a leader in the North American pasta market, which has a $5 billion size. The company holds leadership positions in private label retail, food service and ingredient channels.

The company has wheat milling and production facilities in North Dakota and Minnesota. The business will remain an independent business, to be led by Ed Irion.

CEO and Chairman William P. Stiritz commented on the rationale behind the deal, "I am delighted to welcome Ed, his team, and the Dakota Growers associates into the growing family of Post Holdings' companies. With Dakota Growers, Post continues to expand its portfolio into segments of the overall food industry where it sees opportunities to grow and diversify its strong cash flow."

The acquired activities are expected to add $300 million in net sales and roughly $42 to $46 million in EBITDA. Based on the $370 million price tag, the deal values the business at 1.2 times annual revenues and 8.4 times annual EBITDA.

Excluding transaction related expenses, the deal is expected to be immediately accretive to earnings.

The deal is expected to close in January of 2014, and is subject to closing conditions including antitrust laws and regulatory approval.


Post Holdings ended the third quarter of the fiscal year of 2013 with $243.6 million in cash and equivalents. The company operates with $1.04 billion in total debt, for a net debt position of around $800 million.

The deal will be financed with some $200 million in debt, with the remainder in cash at hand.

Revenues for the first nine months of the year came in at $742.4 million, up 4.3% on the year before. Net earnings fell by some 67% towards $13 million, mainly on the back of higher interest expenses which totaled $60.0 million. At this pace, revenues could approach the $1 billion mark.

Factoring in gains of 5%, with shares exchanging hands at $44 per share, the market values Post at $1.44 billion. This values operating assets around 1.4 times annual revenues and some 70 times estimated earnings.

Post Holdings does not pay a dividend at the moment.

Some Historical Perspective

Shares of Post Holdings went public as the business was divested from Ralcorp (RAH) in January of 2012, which in its turn bought the business in 2007 from Kraft Foods (KRFT).

Post Holdings, known from Honey Bunches of Oats, was spun off at $26.89 per share and its shares have steadily risen to highs around $49 in July of this year. After a recent correction and Monday's 5% jump, shares are exchanging hands at $44 per share.

Between the fiscal year of 2009 and 2012, when Post was under control of Ralcorp for most of the time, revenues have fallen a cumulative 10% to $959 million. Net earnings were cut in half, coming in at $50 million last year.

Investment Thesis

Investors in Post Holdings have seen quite some developments in the first 18 months after being spun-off from Ralcorp. The company has been busy to separate from Ralcorp while creating a solid base to operate as a stand-alone basis.

The company is now expanding in the pasta market, after acquiring Hearthside Food Solutions from private-equity firm Wind Point Partners for $158 million in May of 2013. This deal gave the company exposure to cereal, granola and snacks. With the deal, Post will boost the presence in the high-growth natural food industry. This deal from May will boost annual revenues by $130-$140 million and $17-$20 million EBITDA.

The 5% jump has boosted the market value of the firm by some $65 million. The new $370 million deal will boost revenues by some $300 million, and boost EBITDA by $42 to $46 million.

The newly formed company, with two acquisitions being priced in, stands to generate annual revenues of $1.4-$1.5 billion, EBITDA of around $250 million, and net earnings of merely $20 million. Net earnings will only accrue significantly if Post can deleverage, as Post currently pays $80 million in interest payments per year.

Factoring in the $1.2 billion net debt position resulting from the deal, the enterprise value of the firm is some $2.7 billion. This values the assets at 1.8 times annual revenues and nearly 11 times EBITDA.

Post is making rapid progress in establishing a foundation of its core business, by acquiring promising growth businesses. Yet, this has come at a price in terms of an increase debt, and premium valuation multiples. While Post has world class assets, the premium valuation, high leverage and lack of dividends make me wary to invest at the moment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.