Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

Bob Evans Farms Inc.'s shareholders had their eggs  -- and now they get a nest egg. 

The maker of refrigerated breakfast sandwiches, side dishes and sausages announced Tuesday that it secured a $1.5 billion takeover offer from Post Holdings Inc., marking the culmination of a delicious activist-investor-driven breakup. In January, the Bob Evans restaurant chain agreed to a $565 million takeover by private equity firm Golden Gate Capital, which left the food-manufacturing business as its own publicly traded company and one that Gadfly flagged as ripe for an acquisition by Post or others. Now that portion is getting swallowed, too.

The cereals and breakfast-foods company is paying up for this faster-growing side of Bob Evans, validating Sandell Asset Management Corp.'s years-long assertion that separating Bob Evans restaurants from its food division would ultimately create more value for shareholders.

Including the assumption of a small amount of debt, Post is effectively paying about 15 times projected annual adjusted Ebitda of $107 million and nearly 16 times trailing 12-month Ebitda. By comparison, deals for North American foodmakers worth at least $500 million carry a median Ebitda multiple of 14 over the past five years and a multiple of 10 since such data has been compiled, which just goes to show how transactions in the space have been getting increasingly expensive due to the scramble within the industry and beyond to find growth. 

Premium Products
Post, the maker of Honey Bunches of Oats and other cereals, is paying a rich price to add more popular refrigerated breakfast foods and side dishes to its supermarket offerings
Source: Bloomberg

It's the largest North American food deal of the year if you don't count Amazon.com Inc.'s $13.7 billion takeover of the Whole Foods Market Inc. grocery chain last month. The next-biggest after Bob Evans is Campbell Soup Co.'s $700 million purchase in July of organic-soups maker Pacific Foods of Oregon. However, as I explained last week, Campbell and other packaged-foods suppliers may turn to more and larger deals to protect their profit margins as Amazon's price-cutting pressures the entire grocery industry, so this move by Post may not be the last in the industry we see this year.

As Post's own growth prospects weakened amid lessening demand for cereal, the $5.7 billion company has turned to acquisitions to broaden its offerings. It just completed a $1.8 billion deal in July for Weetabix Ltd., the maker of a British breakfast staple, which left Post's debt-to-Ebitda ratio at 6.4, according to Bloomberg Intelligence. Management signaled Tuesday that it will focus now on integrating the two transactions and addressing its debt.

Fired Up
Post investors are rewarding it for an acquisitive growth strategy relative to other foodmakers that are sitting idle -- even though it means the cereal maker is going deeper into debt
Source: Bloomberg

While Post has certainly stretched its balance sheet this year -- and I've been critical of some other companies doing that -- its move to diversify further away from the traditional U.S. cereal market is smart and timely. Cereal, along with canned soup, is among food categories with the worst growth outlooks in the coming years. As management said, Bob Evans has a presence in the perimeter of supermarkets, where more manufacturers want to be, and with products that are on-trend and convenient for shoppers.

For Kellogg Co., General Mills Inc., Campbell and others tethered to weakening categories, it's time to wake up and smell the ... breakfast sausage. 

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