What the Smuck?!? Analysts highlight Hostess deal risks

Twinkie-flavored Uncrustables?

Just when I thought I had figured out that the health-focused segment was the growth area in food, and thus the most attractive acquisition target, on Monday the J.M. Smucker Co. announced the $5.6 billion acquisition of Hostess Brands, a company solely focused on not just run-of-the-mill junk food but “indulgent” junk food. Smucker is paying a healthy multiple of 17.2x adjusted earnings before interest, taxes, depreciation and amortization for Hostess (a premium to the peer group), which comes to 13.2x when including $100 million in expected cost synergies. 

Hostess boasts a 23% EBITDA margin and is benefiting from its position in the snacking segment, which is growing faster than other food categories. According to Smucker, 70% of American consumers eat at least two snacks each day. Hostess also impressed Smucker with the efficiency of its warehouse distribution model — Twinkies’ near-infinite shelf life may help with that.

Perhaps counterintuitively, the indulgent category of snacking is growing faster than the health-focused category — according to Smucker, 20% faster in recent years. Smucker’s management dismissed an analyst’s question on whether GLP-1 weight loss/diabetes drugs will hit junk food sales, but it seems to me to be a legitimate risk. With the deal, Smucker is taking a different approach than snacking giant Mondelez (which owns Oreo and other snack brands) with its recent acquisitions, which have been primarily focused on products that are perceived as promoting a healthy lifestyle, such as Clif Bar. 

I found this article from Just Food, which summarized some analysts’ views, to be helpful. In addition to valuation, pushback includes the expectation that Hostess’ recent sales growth rate is likely to slow as we get further from the worst of the pandemic (which may have led to stress eating and turning to comforting brands) and Smucker’s track record of buying companies that have already been streamlined by private equity owners (there were frequent comparisons to Big Heart Pet Brands on the call). Meanwhile, deal supporters highlight Smucker’s recent billion-dollar investment in manufacturing space to produce Uncrustables and believe that the potential to use that space to produce Hostess brands hedges that investment. 

Kroger divestiture makes Albertsons merger approval even more likely

Last Friday, Kroger announced a major divestiture that is a major step toward getting its proposed merger with Albertsons approved by the Federal Trade Commission. Kroger will sell 413 stores, eight distribution centers, two offices and five private-label brands to C&S Wholesale Grocers, a major privately held distributor to more than 7,500 independent supermarkets. If necessary, the number of divested stores in the deal could rise to 650. When the Kroger-Albertsons deal was announced in October 2022, Kroger’s antitrust attorneys thought they could get the deal approved by divesting between 100 and 375 stores, and the grocer still believes it is on track for an early 2024 close date after the back-and-forth with the FTC in recent months (though it is too soon to know what regulators think about the C&S deal specifically).

The divestiture to C&S seems to check all the boxes. C&S is well capitalized and has retail experience (owning Piggly Wiggly), which should fend off pushback that the divested stores might be acquired by a company that could go bankrupt and cause stores to close. It is unionized, which lends credibility to Kroger’s earlier claim that no front-line workers will be cut. It is in complementary locations with little overlap with the divested stores (C&S’ retail stores are primarily in the Midwest and the Southwest and it will be acquiring Kroger/Albertson locations largely west of the Mississippi).

For many consumer packaged goods companies, the combination of Kroger and Albertsons means greater customer concentration with a second greater-than-10% customer (CPGs often disclose Walmart as a roughly 20% customer). It is also a potential opportunity for CPGs that can effectively leverage Kroger’s newfound data (for a price) on more than 100 million U.S. households. Better data to support targeted advertising and promotions may have been the biggest motivation for the blockbuster deal.

Flowspace supports CPGs’ expansion into omnichannel distribution

On Monday’s The Stockout show, Grace Sharkey and I interviewed Ben Eachus, co-founder and CEO of Flowspace, a company that supports CPG companies’ omnichannel fulfillment and warehousing practices.

Takeaways from the interview include: 

• CPG companies primarily selling to retailers should locate distribution centers close to those retailers’ distribution centers, whereas direct-to-consumer sellers should locate distribution centers close to their customers’ homes to reduce shipping costs. 
• Consumers heading back to stores are driving greater need for omnichannel fulfillment – meaning that brands previously available only online need to be more available in stores. With that shift, greater inventory visibility and data connectivity are now needed to best utilize inventory.
• Temperature-controlled inventory adds complexity that includes more concentration in warehousing/carrier capacity and more complex logic associated with lot tracking and shelf life picking. 

Upcoming guests scheduled for The Stockout show (live Mondays at 2 p.m. EDT): 

• Sept. 18 — Steve Lewis, division president of the Americas and Asia-Pacific and head of GXO direct. (See the FreightWaves article here.)
• Sept. 25 — Bold Carts CEO Bill Rinehart. Bold Carts manufactures premium vape cartridges, batteries and hardware for plant-based oil extracts. The discussion will include topics such as innovation in cannabis technology and the company’s supply chain.

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Editor: Michael Baudendistel