United Natural Foods - Biggest Acquisition To Date, Tony's Fine Foods Adds To Appeal

May.26.14 | About: United Natural (UNFI)

Summary

United Natural Foods announces a major deal, adding 10% in annual revenues.

Strong acquisition track record adds to further growth appeal as investors applaud the deal.

Valuation has increased significantly in recent years, shares offer appeal only on big dips.

United Natural Foods (NASDAQ:UNFI) announced its biggest acquisition to date last week setting another huge step in its future growth ambitions. The acquisition of Tony's Fine Foods appears favorable although few details have been announced. Despite this, investors applaud management for making the deal.

On further sell-offs shares offer great appeal in my opinion.

Acquisition of Tony's Fine Foods

Last week, United Natural Foods announced that it has entered into an agreement to acquire Tony's Fine Foods, a distributor of perishable food products.

United Natural will pay $195.3 million for Tony's. The vast majority of the deal will be paid by a $187.8 million transfer in cash while the company will furthermore issue 112,000 shares to pay investors in Tony's.

Tony's has been founded in 1934 and sells perishable food products like specialty proteins, cheese, deli, food serve and bakery goods in the Western parts of the US. Goods are sold through retail and specialty grocers as well as other distributors.

The deal is expected to close in the fourth quarter of this year.

Implications Of The Deal

Tony's generated sales of $714 million for the year ending on September of last year, valuing the business at 0.27 times sales. Given that the deal is anticipated to close by the end of the year, the acquisition of Tony's is expected to be accretive to earnings in the fiscal year of 2015. No other details surrounding the profitability of the business have been announced unfortunately.

The cash portion of the deal will be financed with available cash and a revolving credit facility. As a result of the deal, United Natural Foods expects to refinance debt under the current credit facility into a new $150 million real-estate backed term loan.

With the deal, United Food adds fast growing natural protein and specialty perishable products to its assortment which allow the company to boost SKUs and its market share.

Recent Presentation

Back in March, United Natural held a presentation at the UBS Global Consumer Conference, outlining its operations and the future growth path. United Natural is a leading distributor in North America which operates in a growing, yet fragmented market.

The company sells some 65,000 organic, natural and specialty products towards 31,000 customer locations to be served out of 28 distribution centers. Customers include conventional, independent and supernatural groceries, creating solid diversification in the indirect customer base.

The company has been a trustworthy partner for a long time in the industry having long-term contracts with the likes of Whole Foods Market (NASDAQ:WFM), Costco (NASDAQ:COST), Kroger (NYSE:KR) as well as with foodservice companies like Sodexo.

History of Growth

Tailwinds resulting from industry growth and acquisitions have boosted United Natural Food's growth trajectory. Revenues grew from just $1.4 billion in 2003 towards $6.1 billion in 2013. While acquisitions added 1.1% to reported growth in 2013, it was really organic growth of 13.6% which boosted overall growth.

Recent additions which the company made include the 2013 acquisition of Trudeau Foods and the 2012 deal to acquire Honest Green.

This solid performance is reflected in the company's long-term objectives which call for 10-15% revenue growth. Operating margins should improve by 9 to 12 basis points per annum for the near-term future, resulting in 10-19% EBIT growth.

For 2014 the company forecasts revenues of $6.70 to $6.78 billion with GAAP earnings anticipated to come in between $2.45 and $2.51 per share.

Valuing The Business

At $68 per share, United Natural Foods is valued at $3.4 billion. This values the company at roughly 0.5 times anticipated sales for the year and 27-28 times annual GAAP earnings.

The company's net debt position of $260 million will increase significantly following the deal, as a matter of fact it could nearly double.

Note that the company does not pay a dividend at the moment, and dilution has averaged at about 2% over the past decade as the company has issued shares to fund its growth.

Implications For Investors

Investors are arguably happy with the latest deal which will add more than 10% in annual revenues while no earnings details have been released. The fact that the company paid a 0.27 times sales multiple compares very favorable to the company's own valuation at 0.5 times sales. This undoubtedly was a major reason behind the positive share price reaction following the announcement of the deal.

Shares had a big run in recent years, increasing from $15 in 2009 to highs of $80 earlier this year before a recent 15% correction took place. With the company's largest acquisition to date and the leverage incurred, future acquisitions will be likely placed on hold for now.

The latest deal marks another huge step in the growth trajectory and it seems to be a good step. Perhaps if a slightly bigger correction takes place which might push shares to levels in a $50-$60 range, I might be more eager to scoop up some shares.

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.