Hostess Stocks Up on Cookies
We like the deal with Voortman and think the shares are undervalued.
Hostess Brands (TWNK) announced this week that it would pay $320 million for Voortman Cookies, the number-one player in wafer cookies and sugar-free cookies in the United States. We have a positive view of the deal, which brings appealing 5% revenue growth and a low 20s operating margin after synergies, expands Hostess’ presence into the $8.4 billion adjacent cookie category, and was executed at a reasonable acquisition price of 9.1 times EBITDA after $15 million in annual synergies (compared with the 10.8 three-year average for packaged food transactions). We’ve raised our fair value estimate to $17.60 per share from $15.70 to reflect the boost in revenue growth in the next few years as the company expands the Voortman brand into the U.S. convenience and drug store channels, where Hostess currently has minimal presence.
We have been impressed by Hostess’ record of creating shareholder value from its disciplined acquisition strategy, which is one factor underlying our Exemplary stewardship rating. The deal, which is expected to close in early January 2020, will be funded with cash on hand and a $140 million term loan. Net debt/adjusted EBITDA will increase from 3.4 currently to 4.5 times immediately following the transaction, but we expect this to fall to a manageable 2.5 times by 2021.
Rebecca Scheuneman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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