In our current bull market, companies are beginning to come to terms with the fact that their actual businesses are not growing nearly as fast as their stock prices. Before too long, investors are going to ask for companies to show up with businesses that justify their stock market valuations. Just like some companies - such as Microsoft (MSFT), Intel (INTC) and others-are taking advantage of the artificially low interest rates available [in the debt market] before they're gone, some management teams are beginning to realize that the next best route to enabling growth without breaking a sweat is by utilizing their inflated stock valuations to grow their businesses.
Although companies like MercadoLibre (MELI), Arm Holdings (ARMH) and other overvalued technology companies are mainly utilizing their stock prices to dish out hundreds of millions of dollars in options in lieu of cash salaries to keep talented executives, other companies are making a more business conscience move by using their stock certificates to acquire competition and grow their business into what investors are already paying for. In the tech world, some great examples would be the multiple acquisitions made by Salesforce.com (CRM) and Priceline.com. Although these two particular companies have also enriched their executives with countless stock options, they took a step further than others by realizing that their high stock valuations would serve a bigger purpose if it helped them grow their businesses (via stock based acquisitions), and thereby possibly justify even higher valuations.
At the end of the day, a business is only worth what someone is willing to pay you for it (remember this quote for later). And if that sum happens to be billions of dollars that you don't actually need to withdraw from your bank account (i.e. stock), in return for a business that continues to generate sales that do indeed get deposited into the bank account, then who's better than you?
As we've seen in recent weeks, the next sector to undergo some serious consolidation will be the food related businesses. Just this week, we had Sysco (SYY) purchase US Foods', while WhiteWave (WWAV) agreed to buy the organic produce company Earthbound Farm. This leads me to my topic, which is why SunOpta's (STKL) board should vote to sell its thriving organic food company rather than continue to go it alone.
In addition to what was mentioned previously, another outcome of "stock based buyouts" is that they also tend to be much more favorable to the company being purchased. Since the management of both the buyers and sellers are aware that stock certificates are the oldest form of "Bitcoin" in history, companies tend to pay a much higher premium than they would ordinarily in a all cash transaction, thereby making it much easier to get shareholder approval. Everyone wins!
About a year ago I published our thesis on SunOpta and the extraordinary value investors were getting for one of the leading organic food companies in the world. For those who are not familiar with STKL here are a few bullets:
#1 producer of natural and organic fruit snacks in the U.S
#1 processor of confection sunflower in the world
#1 organic soybean processor in the U.S
#1 producer of oat fiber in the world (for food industry)
Although STKL's stock recently lost some ground from their 52 week high, the stock is still up significantly from when we published the thesis. Further, the company has reported record sales in their core organic food business, while the two "hidden ingredients" I discussed in length are still very much in play.
So why should SunOpta CEO, Steve Bromley, and the board move forward with selling the entire company? The simple answer is that management and, most importantly, shareholders would be much better off for it. Despite being only a slightly smaller "business" (i.e. revenues) than Hain Celestial (HAIN), and drastically larger than Annie's (BNNY), STKL is somehow still unknown in the investment world. This lack of popularity means that STKL trades at such a drastic discount to its peers, that it's costing shareholders at least $1 billion in additional shareholder value, according to our estimates. It's even trading at a lower valuation than BNNY despite having a business that's nearly 10 times larger. So how do we arrive at this +1 billion dollar number?
Although sellside analysts like to mainly use future EBITDA as their multiple for stock price targets, the fact still remains that "at the end of the day, a business is only worth what someone is willing to pay you for it." And by that I mean the "entire business." In the organic food industry, it is not a coincidence that the Price/Sales multiple is often the more applicable multiple that the market goes by. The best examples would be if investors looked at what valuations were paid for entire companies, rather than just some of their shares. As previously mentioned, the organic food company WhiteWave just bought out private company Earthbound for $600 million, a multiple of 1.20 times their expected sales of $500 million ($600mm/$500mm = 1.2). Keep in mind that Earthbound Farm is a private company being bought out, which tends to be a discount to the valuations public companies typically receives in a buyout. Further, if you look at the chart below, you'd see that the average public company in the sector is receiving a P/S multiple of 2.01, clearly showing the public over private premium I just mentioned.
But despite the fact that STKL is expected to generated $1.35 billion in sales in the coming year, the lack of investor knowledge of its existence is yielding SunOpta investors a market valuation of a mere $585 million, at the current price of 8.82. This is a P/S multiple of only 0.43, even cheaper than the smaller private company Eastbound. This is why it makes all the sense in the world for SunOpta management to move forward with putting the company on the block and selling it to the highest bidder. If STKL gets a valuation like the rest of its public peers (P/S of 2.01), then the valuation would be in the range of $2.7 billion, or approximately $39.59 per share, a staggering 447% premium for current investors. In fact, even if STKL somehow gets sold for a steal of a price like the recent private Earthbound Farm transaction, at a Price/Sales multiple of 1.20, it would still yield STKL investors a valuation of $1.62 billion, or $23.75 per share, a cool $1 billion in additional shareholder value I mentioned before (268% premium to current price).
The reality is that anyone who knows the organic food industry would also know that there are very few big players in the industry. At $1.35 billion in revenues, SunOpta is considered one of the largest players, towering over numerous $10 and $20 million revenue companies. My experience has taught me that this type of unique player is more likely to deserve a premium, rather than a private company discount. But regardless of which premium STKL gets, and even if one were to choose to use the sellside analyst favorite multiple based on EBITDA, it is management and the board's fiduciary responsibility to do what is best for shareholders. Although we are very confident in management's ability over the long run, with at least $1 billion in shareholder value missing from the current picture, it makes much more sense to just put the company up for sale and get paid today.
Additional disclosure: RCI is long STKL.