Did Archer Daniels Midland Get A Good Deal By Acquiring Wild Flavors?

Jul. 9.14 | About: Archer Daniels (ADM)

Summary

The food industry is changing rapidly, as the preference of consumers change.

Food companies struggle to combine nutritional value with good taste.

ADM should be able to fill this gap with the help of Wild Flavors.

This week started with an announcement that Archer Daniels Midland (NYSE:ADM) is acquiring Wild Flavors for a total of $3 billion. ADM will be creating a new business initiative by combining the product portfolio of Wild Flavors with some of its existing products. The combined initiative is expected to generate $3.25 billion in annual revenues, with Wild Flavors' products making up roughly $1.3 billion of this amount. This acquisition is a part of ADM's multi-year comprehensive plan to maximize shareholder returns by taking advantage of the new trends of population growth and income increases in the developing world.

ADM is a fairly large company with a well-diversified portfolio of products. This makes portfolio management a big part of the company's day-to-day operations, and the company spends a tremendous amount of time and resources in determining how to strengthen its portfolio in a way to fuel growth in the long term. This means taking a deep look at the company's products and figuring out the products that will be growth drivers and the ones that will not be significant contributors to the company's growth. In this stage, capital allocation becomes a big part of the game where such decisions will affect the future of the company. Acquisition of Wild Flavors will increase ADM's responsibility in managing its product portfolio.

Wild Flavors engages in natural flavor systems. The company produces different types of flavors for different types of food products using natural ingredients. The company also invests heavily in research and development in order to stay ahead of the competition.

Current consumer trends are changing

Currently, there are multiple trends driving the food market on the consumers' side. Apart from a growing population, increased wealth or historically poorer nations and a stronger overall demand for food, there are also other themes that shape the food industry as we speak. For example, current food consumers want healthier alternatives to the existing food products. They want higher protein and lower fat content in their food, and many consumers are willing to pay more for natural ingredients, especially if those ingredients were locally grown. Localization also occurs in the consumer end of the game because consumers in different localities enjoy different tastes. People in some regions appreciate spicy food, while those in other regions dominantly enjoy sweet food. It is very important for food companies to understand this and make the most desirable products available in the corresponding markets.

Taste is the key

The acquisition of Wild Flavors will improve Archer Daniels Midland's hand in all of the areas mentioned above. ADM currently owns a portfolio of healthy snack brands and other natural products such as Fibersol-2, NutriSoy and VegeFull. While it is true that consumers are increasingly picking healthier food products over those that are perceived to be healthy, the majority of the food buying decision still rests on how the product actually tastes. It is very difficult to produce a food product that is natural, healthy and nutritional, while maintaining a good taste because most of the "desirable" taste in foods comes from unhealthy ingredients such as fatty and sugary items. Being able to produce food that is natural, nutritional, healthy and tasty all at once has been a major challenge to food companies. This is where the product portfolio of Wild Flavors will be a great addition to ADM's portfolio. In fact, ADM's own research has shown that taste is the greatest driver of food-buying decision and it even comes before the pricing of the items.

Wild Flavors complements ADM's current business

Wild Flavors is one of the largest companies in the world that specialize in flavor systems. The company currently has a total of 3,000 customers in 130 countries, and it operates in 23 countries. It has been able to customize products or copy tastes of other products by using only natural ingredients, as it employs more than 400 specialized scientists and application specialists.

ADM generally serves medium and large companies that focus on packaged foods and its strongest market is North America where a great majority of ADM's customers are. In contrast, Wild Flavors serves a lot of smaller companies that produce beverage and other types of food. Furthermore, the largest market for Wild Flavors is Europe with additional exposure in Asia and Latin America. Not only does Wild Flavors have customers internationally, but the company also receives raw goods from vendors across the world and it runs a good relationship with many local farmers, and serves as a bridge between local producers and local customers in many international markets. This is something ADM needed in order to post a meaningful growth rate in markets outside of North America.

The synergy between the two companies will result in an additional $130 million in annual income. About two thirds of this figure will come from increased revenues, and the rest of the figure will come from cost-savings. Almost all of the acquisition will be paid for with equity and ADM will be able to see its profits increase almost immediately. Helped with this acquisition, ADM plans to be able to meet its goal of having a ROIC (Return on Invested Capital) of 8% within three years and 10% in the long-term. Moreover, this acquisition will increase the diversity of ADM's product portfolio, increase the scale of the company, reduce the volatility of its financials and improve its margins.

Conclusion

ADM definitely made a good bet with Wild Flavors. This will be a great addition to ADM's current product portfolio and the company will increase its global reach. Currently, the ball is in ADM's court and it is up to ADM to make this acquisition work and get a good return on investment. If things work out as ADM is projecting them to do so, this acquisition will reward the investors of this company handsomely.

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