Hershey (NYSE:HSY) announced a rather interesting bolt-on deal with the purchase of Amplify Snack Brands (BETR). The deal adds roughly 5% to total sales but will boost the overall growth profile of Hershey by half a percentage point, being quite something in the packaged food business at large these days.
I like the strategic rationale of the deal as the fat multiple can be justified by strong growth, cheaper financing and promise for $20 million in costs synergies. While the overall impact of the deal is limited in financial terms, it certainly adds to the growth profile of the business. The issue is that Hershey itself remains pricey at 24 times adjusted earnings. The modest growth, low interest rates and M&A interest in Hershey itself, makes that shares continue to trade at fat multiples, a bit too fat in my book.
The Deal
Hershey has agreed to acquire Amplify Snack Brands in a deal which values equity of the business at $12 per share. CEO Michele Buck claims that the deal will help Hershey to create an innovative snacking powerhouse, as the company gains access to Amplify´s key Skinny Pop popcorn brand as well as other snacks such as Tyrrells, Oatmega and Paqui.
Amplify has seen a huge boost following the success of Skinny Pop in 2014, after which the company went public in 2015. Ever since shares have fallen from levels in the mid-teens to a low of $5 in recent weeks after an acquisition in the UK did not turn out as planned, and left the company heavily in debt.
Including debt, the total price tag of the deal comes in at $1.6 billion. This makes that Hershey is paying 14.8 times EBITDA, however that includes $20 million in expected costs savings to be achieved in two years from now. That suggests that EBITDA comes in at $108 million, which includes $20 million in synergies. Amplify is on track to post depreciation charges of around $8 million this year. Assuming that Hershey can refinance/finance the deal at 3.5%, interest expenses come in at $56 million. That adds about $39 million to the bottom line if we assume a 30% tax rate and ignore amortisation charges.
With the deal, Hershey will grow sales by $372 million a year as organic growth of these sales comes in at the high single digits, providing a boost to the overall growth profile of the business.
A Strategic Deal
Like many large food conglomerates, Hershey desperately aims to boost topline sales growth and its organic growth profile. In October, Hershey released its third quarter results which revealed that sales were up 1.5%, although aided by a 40 basis point tailwind from a softer dollar. The 1.1% comparable growth number was supported by a 70 basis point increase in volumes and a 40 basis point increase in pricing. While the modest growth appears nice in a challenged environment, these are uninspiring growth numbers and are in line with expected growth of 1.25% this year.
Following the deal, Amplify will add less than $400 million in sales to a business which generates $7.5 billion in sales. The pro-forma revenue contribution comes in at just 5%. If Amplify can grow sales by 10% on an organic basis, that number could boosts all of Hershey´s total growth by 50 basis points per annum, certainly a nice addition when organic growth barely surpasses 1%.
Hershey ended the third quarter with $275 million in cash and $3.17 billion in debt. This $2.9 billion net debt load will jump to $4.5 billion following consummation of this deal. Hershey posts EBITDA of $1.4 billion, but that is based on GAAP accounting. Based on adjusted earnings, adjusted EBITDA runs at $1.7 billion as this number will increase to $1.8 billion following the deal. With EBITDA running at $1.8 billion, leverage ratios remain relatively reasonable at 2.5 times.
Hershey itself expects to earn roughly $4.75 per share on an adjusted basis, with GAAP earnings seen roughly $1.15 per share lower. The vast majority of this relates to impairment charges, as I am reasonably comfortable to use the adjusted earnings number in this case.
Trading at $115, shares can hardly be called cheap at 24 times adjusted earnings, despite the very modest growth and still reasonable leverage multiples. As Hershey is trading at fat multiples itself and Amplify is a relatively small deal, it is no real surprise to see hardly a share price reaction in response to the deal.
Final Thoughts
While the deal with Amplify looks expensive, it probably can be justified by expected synergies of $20 million a year and the fact that Hershey can borrow much cheaper than Amplify Snack Brands itself. The deal is really a bolt-on deal for a company the size of Hershey, adding roughly 5% to total sales as the near 10% organic growth profile adds roughly half a point to all of Hershey´s organic growth profile, certainly a nice addition.
With the deal, Hershey will furthermore focus more on snacks, a very popular category in today's food environment, as the company moves in part away from its core chocolate franchise. While the growth profile will improve towards the 2% mark, shares remain relatively pricey as they trade at 24 times adjusted earnings, while leverage is still somewhat average in relation to peers.
Part of the premium valuation is a result of the low interest rate environment of course, as well as interest of peers after Mondelez tried to take over the company in the summer of last year. That deal would have created the largest candy and chocolate maker in the world but was blocked by Hershey's trust.
Shares have furthermore become a bit more expensive in recent weeks after shares rallied from levels around the $100 mark in early October to a high of $115 at this moment in time. Using a 20 times multiple to reflect improved growth and reasonable leverage, I am only a buyer if shares dip to the high double digits, which makes me a very patient buyer at these levels.
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