This commentary was originally sent to Action Alerts PLUS subscribers at 08:25 on July 7.
A takeover at last! Overnight we learned that WhiteWave Foods (WWAV), the healthy & organic foods company known for selling a litany of organic and plant-based alternatives to milk and yogurt (such as Horizon Organic milk and its line of Silk almond beverages) has agreed to be acquired by Danone (DANOY), the French company best known for selling branded yogurt and Evian water in a transaction worth $56.25/share in cash, a near-25% premium to WWAV's 30-day average price.
The Financial Times first reported the deal, which some analysts believe could turn into a bidding war, given the scarcity value of WWAV's growth trajectory. We couldn't be more ecstatic around the acquisition, which has been unanimously approved by the Board of Directors of both companies and is expected to close by the end of the year.
We are the first to understand just how enticing the WhiteWave asset is within the consumer packaged goods landscape desperate for growth (with flat to negative top-line growth serving as the norm). In last Friday's weekly roundup we noted: "If the food space begins a period of consolidation, WWAV's name is sure to come up in many of the discussions given its prime position in an increasingly important healthy/organic market. The company is a double-digit grower in a sector desperate for growth, and that can't be ignored".
We have always loved the company for its fundamentals and although we believe it would likely take one-two years for WWAV shares to appreciate above the $56 takeover price as a standalone, Danone's resources clearly enhance long-term growth opportunities on numerous fronts and offer a myriad of synergies.
We have long argued that the main bear thesis -- which claims shares are overvalued -- lacks either historical context or rigorous analysis. In a weekly roundup earlier this year, we noted: "while shares appear to trade at an elevated multiple in an absolute sense, investors appear to forget the scarcity value of its growth profile as WWAV's premium to the large-cap group sits at its lowest level in nearly three years (trading at about 30% premium vs. 80% in 2015 and 60% since its 2012 IPO). While a rerating of shares will likely take time and hinge upon enhanced organic growth visibility, such a massive dislocation in a stock in the absence of a material change in fundamental trends makes the investment case at current levels quite compelling. The historical criticism around WWAV's premium valuation is no longer viable given the severity of its multiple compression ... the fundamental and non-fundamental factors that have underpinned WWAV's prior valuation (i.e., growth momentum, strategic optionality and secular shift in consumption patterns toward natural and organic) appear to remain intact".
We do not intend to trim our exit our position immediately, and plan to hold onto shares for the time being, as $56.25 appears to be the baseline bid. Once we receive clarity around whether or not a counter-bid will emerge, we will likely take our profits and trim our outright sell out of the name. Until then, we stand by.
We are thrilled to see the best-case-scenario play out, and raise our price target to $60 to reflect a slight premium to Danone's $56.25 bid. We would not be incremental buyers off the news -- which is roughly 30% above our cost basis -- but would also not be surprised to see counterbids emerge, as WhiteWave looks like a once-in-a-lifetime opportunity for any fledgling packaged food company with dry powder.