Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Pinnacle Foods, absent from mergers since its suitor walked away a year and a half ago, finally found a deal its shareholders can get excited about. 

Pinnacle, the $5 billion maker of Birds Eye frozen vegetables and Vlasic pickles was slated to sell itself to Hillshire Brands last year for a 20 percent premium. But then poultry-and-meat giant Tyson Foods launched a bid for Hillshire and succeeded, leaving Pinnacle in the cold. While the company's shares had risen 31 percent since then through Monday, it's tough to see why. Like most mainstream foodmakers, Pinnacle's growth is weakening from a combination of tired brands and changing consumer tastes, particularly in the shift to foods billed as healthy and organic. 

Tuesday, the foodmaker delivered some good news, though. It announced a $975 million takeover of Boulder Brands, a company that has capitalized on the increasing popularity of gluten-free and dairy-free foods and whose revenue is climbing faster than Pinnacle's. Boulder's products include things like vegan, non-GMO, lactose-free, egg-free, zero-trans-fat Earth Balance soymilk, kettle chips and Mindful Mayo, as well as Evol frozen meals and Smart Balance butter-like spreads. The deal will be accretive beginning next year. 

Better Growth Trend
Through the deal, Pinnacle is adding gluten-free baked goods and dairy-free spreads to its more conventional food products that aren't growing as quickly. Sales trends side by side:
Source: Bloomberg

At a price equal to about 29 times Boulder's trailing 12-month Ebitda, the valuation may look expensive when compared with other big food deals of the past few years in which the median multiple is less than half that, according to data compiled by Bloomberg. But few of those involved young, fast-growing brands. For instance, ConAgra bought Ralcorp, an already established maker of private-label foods, for a far lower multiple of 12.5 times Ebitda -- and we know how that ended. And Diamond Foods agreed in October to buy Snyder's-Lance, largely a traditional snacks maker, for 18 times Ebitda. The one truly comparable transaction to Boulder is General Mills' acquisition of Annie's last year for about 36 times Ebitda. 

Plus, Boulder's relatively low Ebitda is projected to more than double next year, already making the transaction appear much cheaper. And those estimates were made before it links up with Pinnacle, a company that has deep ties with grocery chains and can probably scale up its brands. 

North American Food M&A
Deal activity in the industry has picked up as traditional food giants search for new, faster-growing brands. A $55 billion merger of Heinz and Kraft also took place this year.
Source: Bloomberg

Pinnacle's stock fell about 3 percent Tuesday morning, but it's exactly the kind of deal the company needs. When you look at its own offerings, you can see why. On the one hand, its products are found in 85 percent of U.S. households and are first or second in the market-share rankings for most of the major food categories in which they compete, Michael Halen, an analyst for Bloomberg Intelligence, wrote earlier this month. Even so, it's not like Wish Bone salad dressings, Mrs. Butterworth's pancake syrup and Mrs. Paul's fish sticks are on the verge of a big sales resurgence. Pinnacle's brands are stable and profitable, but not exactly big growth drivers. 

The one risk here is that another bidder with deeper pockets jumps into the bidding. Though Boulder has been considered a takeover candidate for a while now, sometimes it takes a competitor making an offer to attract the attention of other would-be suitors. Now it's officially in play, and all of the major food companies are desperate for growth and looking for inroads into the natural, organic, gluten-free, every-possible-bad-ingredient-free space. And even though there are others with more impressive sales growth trajectories than Boulder, the need for dairy-free stuff will probably be around for a while.

Boulder shares were trading just 7 cents below the $11-a-share offer on Tuesday morning, a minuscule spread for a transaction that just got announced. So some investors may be wondering about the possibility of competing bids. It would be a real blow to Pinnacle to have a deal stolen away from it again.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net