Our $133 fair value estimate for narrow-moat Smucker (SJM) should not see a large change after it announced plans to acquire Ainsworth Pet Nutrition (maker of Rachael Ray Nutrish Pet Food) for $1.9 billion in cash and that it is exploring strategic options for its U.S. baking business. The moves come on the heels of Smucker’s thwarted attempt to acquire Wesson’s cooking oil lineup from Conagra, which the FTC challenged.
The offer corresponds to a purchase multiple of around 22 times EBITDA, versus the roughly 25 times General Mills is offering for Blue Buffalo. After synergies and expected tax benefits, the Ainsworth multiple dips to around 12 times, versus 22 times for Blue Buffalo.
We have long been skeptical of Smucker’s ability to justify the 13 times EBITDA it paid for Big Heart Pet Brands in 2015 (9 times after synergies expected upon announcement of the deal), a fear validated by a $177 million impairment in the third quarter. While the path to synergies is clearer given the existing pet unit (Smucker did not have a presence in the industry prior to its Big Heart deal), we remain concerned that the purchase comes as Smucker has struggled organically in the sector. The Ainsworth multiple appears somewhat high though not egregious (Blue Buffalo has a more premium standing), and we expect the Rachael Ray brand (two thirds of Ainsworth’s sales) to help offset weakness in Smucker’s lower-end mainstream offerings.
Smucker’s U.S. baking business accounts for around $370 million of the consumer foods unit’s $2.1 billion in sales (or around 5% of overall revenue, including Ainsworth). While its brands (including Hungry Jack, Martha White, and Pillsbury) carry weight, the segment has struggled alongside the category. While Pinnacle's success with Duncan Hines suggests a way to succeed through innovation in a declining category, we applaud Smucker’s openness to moving away from a segment under intense competitive pressure with diminishing significance to grocers.
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Zain Akbari does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.