Hain's Buyout Disappearing Act

Would-be suitors are rightfully uneasy about accounting problems.

Just like that, Hain Celestial's buyout prospects went poof -- at least for now. 

The maker of Celestial Seasonings tea and Terra chips shocked investors on Monday when it said it wouldn't be able to release its annual earnings report because of concerns about the adequacy of its financial reporting. The perennial takeover target also abandoned its sales and profit targets for the year. Unsurprisingly, its stock tanked -- plunging nearly 30 percent -- as investors reacted to what is most likely just the beginning of a long slog over accounting issues. 

Look Out Below

Hain's shares plunged 30% after it disclosed an audit probe that would prevent it from releasing earnings

Source: Bloomberg

Intraday times are displayed in ET.

Wall Street analysts immediately cut their stock ratings. Alliance Bernstein said it would suspend coverage altogether until the issues were resolved. Other investors should follow suit. Things are going to get worse before they get better for Hain, which said it wouldn't release the results until the completion of an independent audit review

Hain's shares had surged 32 percent year to date after the sale of rival WhiteWave Foods to Danone stoked speculation that it would be the next healthy-ish food company to be snapped up. In a world where food giants like Pepsi and General Mills are desperately trying to reverse stagnating sales, they have little choice but to pay up for better-for-you brands, and pricey valuations become besides the point, fellow Gadfly Tara Lachapelle notes

The Me-Too Trade

Hain's shares spiked after Danone bought rival WhiteWave

Source: Bloomberg

Even before the accounting issue, fissures were starting to form around the Hain story. As I wrote in May, sales of the fast-growing food maker slowed, turning negative in the U.S. for the first time. It became tougher for Hain to buy small companies and fold them up into its ever-expanding roll-up of more than 50 brands. As the rest of the packaged-food industry improved gross margins through intense cost-cutting, Hain's gross margin declined; its profits fell. Its CFO left last September and its chief accounting officer resigned in January.

Parsing Profits

As the rest of the packaged-food industry improved gross margins, Hain Celestial's gross margin declined

Source: Bloomberg Intelligence

Median gross margin is calculated for 150 North American packaged-food companies followed by Bloomberg

Still, analysts remained pretty bullish on the stock even as they slowly pulled down 12-month price targets. But most of the frothiness had to do with the expectations that the company would be plucked by a bigger player, masking the deteriorating business conditions at the maker of everything from baby food to shampoo. 

Investment bank Jefferies pointed out Tuesday that for true Hain believers, the stock drop could present an opportunity for investors to scoop up shares at a discount.

It could also create an entry point for Big Food to take a bite out of Hain while the going is tough and shares are cheaper -- even if it's just to snap up a couple of worthwhile pieces rather than the whole company. After all, there aren't a lot of cheap deals to be found these days, and Hain just lost roughly $1.5 billion of its market value in 24 hours. 

The vultures may still be circling, but until the books are figured out, smart companies will stay at bay. Investors shouldn't count on that takeover premium anytime soon. 

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

    To contact the author of this story:
    Shelly Banjo in New York at sbanjo@bloomberg.net

    To contact the editor responsible for this story:
    Daniel Niemi at dniemi1@bloomberg.net

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