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Investors in WhiteWave Foods (NYSE:WWAV) react favorably to the announced acquisition of Earthbound Farm, which occurs at very favorable relative valuation multiples.

While I applaud the deal, and shareholders do so as well, the valuation is not attractive enough for me, despite the attractive growth and strong brand names. I remain on the sidelines.

The Deal

WhiteWave announced that it has agreed to acquire Earthbound Farm. The company will spend some $600 million in cash for a leader in organic foods.

Both companies are pioneers and innovators in the organic industry. Earthbound is the largest organic produce brand in North America and a leader in organic packaged salads. The company furthermore produces organic fruits, snacks and dairy products through its brands Silk, Horizon Organic and International Delight, among others.

CEO and Chairman Gregg Engles commented on the rationale behind the deal, "Earthbound Farm is an outstanding organization well-known for innovation, freshness, organic stewardship and food safety. It is a natural extension of our business that reaffirms WhiteWave's leadership in the organic foods and beverages industry in North America."

Earthbound is anticipating sales of $500 million in 2013. The deal is expected to add about seven cents per share to adjusted earnings in the first fiscal year after closing of the deal.

The deal is subject to normal closing conditions and is expected to close in the first quarter of 2014.

Valuation

Back in November, WhiteWave released its third quarter results for the year of 2013. The company ended the quarter with $87.1 million in cash and equivalents. Total debt stands at $722.5 million, resulting in a net debt position of $635 million.

Total revenues for the first nine months of 2013 came in at $1.86 billion, up 10.8% on the year before. Net earnings fell by 5.3% to $79.5 million, the result of a $7.4 million asset write-down.

At this pace, revenues are seen around $2.5 billion for the year, while GAAP earnings could come in between $110 an $120 million.

Factoring in gains of 5% on the back of the deal, with shares trading at $23 per share, the market values WhiteWave at $5.2 billion. As such, equity in the firm is valued at 2.1 times annual revenues and roughly 45 times GAAP earnings.

WhiteWave Foods does not pay a dividend at the moment.

Some Historical Perspective

Shares of WhiteWave Foods were sold to the general public in October of last year at a price of $17 per share. Ever since, shares have risen about a third. WhiteWave was being sold by Dean Foods (NYSE:DF) as a spin-off, consequently Dean Foods still holds a sizable stake in the company.

Between 2009 and 2013, WhiteWave is set to increase its annual revenues by a cumulative 65% to $2.5 billion. GAAP earnings more than doubled in the meantime to an expected $115 million this year.

Investment Thesis

The deal is applauded by WhiteWave's shareholders which boost the value of the company by a cool $250 million.

Earthbound is being valued at 1.2 times sales, and 8 times EBITDA. The $0.07 per share accretion could boost earnings by some $20 million after tax, and after financing costs, which is quite sizable. Assuming 4% interest costs, WhiteWave Foods is earning about $30-$40 million after tax. This values the company at 17 times annual earnings.

This represents quite a discount compared to WhiteWave's own valuation at 2.1 times annual revenues and 45 times earnings. As such, WhiteWave might be getting a bargain as Earthbound could have fetched a billion if it were to be acquired at similar multiples to which WhiteWave is trading at the moment. No wonder, that investors are bidding up the shares by a quarter of a billion. The strong growth of Earthbound is satisfactory as well.

Combined, the new WhiteWave is on track to post revenues of $3 billion, as earnings could come in around $150 million. The $5.2 billion valuation implies a valuation of 1.7 times annual revenues and 35 times annual earnings. The $1.2 billion debt position will increase significantly following the deal, and warrants some attention.

As such, the deal is a great addition offering a further roadmap for growth within a growing category. Earthbound has large organic facility in California and is a large vertically integrated supplier of organic foods.

While I love the deal, notably on a comparable valuation basis, the overall valuation of WhiteWave is a bit too steep for me at the moment. This is despite the very strong brands and rosy long term growth prospects. Therefore I remain cautious and stay on the sidelines. A short position would not be safe, as the company can easily grow into the valuation.

Source: WhiteWave Foods - Compelling Acquisition Of Earthbound Farm