Kellogg Company (K): Post Holdings Inc (POST) Will Not Stabilize Despite Its Sensible Acquisition

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The positive trend of achieving quick growth through acquisitions has become the norm in many industries and the packaged food industry is one of them. Mergers and acquisitions are a costly but speedy way to achieve growth and enhance product range. Companies usually undertake acquisitions that are complementary to their existing business to penetrate deeper into the market rather than diversify into new businesses. A similar approach was followed by Post Holdings Inc (NYSE:POST) , a leading manufacturer, marketer and distributor of branded ready to eat cereals, when it recently acquired Premier Nutrition.

Post Holdings Inc (NYSE:POST)

The details of the acquisition

The acquisition offers Post Holdings Inc (NYSE:POST) a platform to achieve expansion in the active nutrition and supplements businesses. Premier is currently in its high-growth phase. The company is a marketer and distributor of premium protein beverages and foods under its Premier Protein brand and nutritional supplements under its Joint Juice brand. Merging with Premier will provide Post Holdings Inc (NYSE:POST) an opportunity to enter this high growth and dynamic category of foods.

The financial impact

The company expects this deal to provide synergies in two areas: the core operations and the tax impact. This deal is projected to add nearly $130-$140 million to the company’s top-line on an annual basis and approximately $17-20 million to its EBITDA, which stood at $204 million in 2012. On a per share basis, this acquisition will add $0.53 to the company’s current EPS of $1.45.

Since Premier is currently operating at a loss, this will allow Post to utilize its losses to reduce its tax liability. Post Holdings Inc (NYSE:POST) has a net income (ttm) of $39 million, which can be offset against Premier’s losses. The company forecasts the tax benefits to range in between $22-26 million on a net present value basis i.e. an immediate increase in shareholder value of $0.69 per share.

The payment of the deal will be made in cash, a total of $180 million. The company had cash and cash equivalents of $365.4 million on hand, as of March 31.

The current status of competitors

Kellogg Company (NYSE:K) is also a key player in this industry and an active rival of Post Holdings Inc (NYSE:POST). The company recently introduced its first range of frozen soups-Moroccan Minestrone and Savory Chicken Noodle. In the quick meal segment, Kellogg Company (NYSE:K) is introducing new options specifically in the soup and steam meals.

Moreover, the company has also launched new breakfast products, e.g. hot cereals, bars, shakes, to cater to the customer’s changing eating patterns as they turn more weight conscious. This is the company’s first hot cereal in the U.S. and includes a certain proportion of fiber and protein. The availability of this convenient product will cater to the needs of 30 million Americans who skip breakfast on a daily basis. Also, there are reduced chances of metabolic syndrome with a cereal breakfast as it contains fiber and whole grain, according to recent research. This news is likely to boost the demand for Kellogg Company (NYSE:K)’s current and new breakfast product range.

The sales achieved in the recent quarter were slightly lower than the planned target, especially in the U.S., but the company’s continuous efforts to control costs has enabled it to counterbalance the adverse sales variance impact. The company acquired the brand Pringles, which has contributed positively to the company’s financials. It is further anticipated to provide growth opportunities to the company.

PepsiCo, Inc. (NYSE:PEP) is another renowned name in the packaged food industry. The company operates nearly 700 manufacturing facilities worldwide and 100,000 distribution routes. It has a product portfolio that includes 22 brands that generate more than $1 billion each in annual retail sales.
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