The business model of the food distribution industry has started to change. Inflation in the food industry due to the recent drought in the US and declining traffic in the restaurants is slowing down this business. These factors are creating difficulties for the industry players to grow organically. Therefore, the food distributors have started finding new ways for survival in the industry by diversifying their operations into new segments.
The larger players of the industry are now focusing towards acquiring small privately owned businesses as these businesses provide the opportunity to serve niche markets. Others are expanding their customer base by making mergers with their peers. (Source: Senior Vice President of US Bank Food Industries)
Recently, Spartan Stores, Inc. (NASDAQ:SPTN) announced it would enter into a merger agreement with Nash-Finch Company (NASDAQ:NAFC). In this article, I will analyze the impacts of this merger by these two leading players.
Synergies derived from this merger
The merger of Spartan Stores, Inc. (NASDAQ:SPTN) and Nash-Finch Company (NASDAQ:NAFC) is valued at approximately $1.3 billion, including the existing net debt of each company. It will increase the geographical reach and market presence of both the companies with the 22 distribution centers covering 37 states with its 177 retail stores. It will add more strong brands to the company’s portfolio.
The pro forma sales are estimated to be $7.5 billion coming from three highly competitive and balanced business units: military distribution, wholesale distribution and retail. Together, the combined company will become the leading distributor to military commissionaires and exchanges in the US.
In this merger, 57.7% of the equity share of the combined company will go to the Spartan Stores, Inc. (NASDAQ:SPTN)’s shareholders and 42.3% will go to Nash-Finch Company (NASDAQ:NAFC)’s shareholders.
This combination will result in operational efficiencies and savings to the two companies. It is anticipated that the merger will save $50 million in annual costs by the third fiscal year of combined operations. This reduction in the cost will increase the operating margins and net income of the companies in the coming years.
The merger is expected add accretion to the per share earnings. The dividend will be initially set at $0.48 per share on an annualized basis, and it is expected to consistently grow in the upcoming periods. Spartan Stores, Inc. (NASDAQ:SPTN) paid $0.32 of dividends in 2012 while Nash-Finch Company (NASDAQ:NAFC) has been paying $0.72 per share dividends from the last 6 years. The new dividend set after the merger will benefit Spartan’s shareholders as their dividends income will increase by 33.33%, but it would be unprofitable for Nash-Finch’s shareholders as their dividends income would decline by 33.33%.
The market position of competitors
The Andersons, Inc. (NASDAQ:ANDE) in collaboration with Lancing Trade Group has acquired Thompson, a grain and food bean handler. Anderson and Lancing each will hold 50% of Thompsons’s share. The acquisition will help Anderson in expanding its business in new geographical regions and provide climate diversification. It will provide substantial assets to The Andersons, Inc. (NASDAQ:ANDE), which the company can utilize to leverage its expertise in grains, edible beans, food ingredients and agronomy.
This acquisition will add grain storage capacity of 10 million bushels and 15,000 metric tons of nutrient capacity. Further, the acquisition will build on the core competency of Anderson in several segments like commodity merchandising, commodity bulk handling etc. As a result, the company’s position will strengthen in new regions and enhance its revenue generation capability due to a diverse customer base.
The merger made by Spartan Stores, Inc. (NASDAQ:SPTN) and Nash-Finch Company (NASDAQ:NAFC) has enabled them to increase their market shares. Moreover, it will provide cost benefits to the companies and eventually increase their profits and per share earnings.