My jaw dropped when I saw it. General Mills (GIS) to buy Annie's (BNNY) for $46 a share. Forty-six dollars! An astounding 37% premium to the close and a 51% premium to the last thirty days.
General Mills, the best-run traditional food company in the packaged goods industry, buying the single most challenged -- some would say most poorly run -- independent natural and organic food business in the entire segment.
It's the ultimate comeuppance, some would say even the ultimate embarrassment, because General Mills has about the longest-running history of disciplined capital allocation, while Annie's has pretty much disappointed for multiple quarters. It has had a very sorry execution pretty much for most of its two and a half years of public existence.
Yet when the dual releases came out it was all victory lap for John Foraker and his Annie's team. Under the heading "Annie's to be acquired by General Mills for $46 per share in cash," the company's second line of the release after the terms are stated seems downright surreal: "this acquisition will enable Annie's to enter a new phase of growth and success while maximizing value for stock holders." Huh? I though General Mills was buying Annie's. This makes it sound like the other way around.
It gets worse. Next up is a quote from Foraker himself: "we are excited about this strategic combination, which will enable Annie's to expand the reach and breath of our high quality great tasting organic and natural products, provide new opportunities for our employees, realize greater efficiencies in our operations and maximize value for our shareholders." OK, wait a second, Annie's, you already told us that you are maximizing shareholder value, now you are expanding your reach, not that of General Mills?
And then Foraker delivers the coup de grace: "powerful consumer shifts toward products with simple, organic and natural ingredients from companies that share consumers' core values show no sign of letting up. Partnering with a company of General Mills' scale and resources will strengthen our position at the forefront of this trend, enabling us to more rapidly and efficiently expand into new channels and product lines in a rapidly evolving industry environment."
You have to be kidding me. General Mills isn't buying Annie's, Annie's is partnering with General Mills! You can't make this stuff up. This is no takeover, this is a total triumph by a company that is regarded in the industry as the one company that has not been able to execute with any consistency.
Now compare this release with the one that General Mills put out: Under the heading "General Mills to acquire Annie's, acquisition will expand General Mills' fast growing natural and organic foods business," General Mills lists all of its other natural and organic divisions, like Cascadian, Muir Glen and Food Should Taste Good brands -- I agree with that last one by the way -- and then we get a quote, not from CEO Ken Powell but from Jeff Harmening, the executive vice president and chief operating officer, about how the acquisition will "significantly expand our presence in the U.S. branded organic and natural foods industry."
That's not hard. General Mills has nearly 18 billion dollars in sales; only about $330 million of those sales are natural and organic, according to Bloomberg, and they are including Larabar energy bars, which may not really qualify. Annie's by contrast has $208 million in sales, but stacked on top of $330 million it does seem like a lot.
And to get those bragging rights, General Mills paid through the nose, namely 27x earnings before interest taxes depreciation and amortization. Just so you know, the compares on the 42x forward earnings that Generous Mills is paying comes out to the equivalent of $172 for Hain (HAIN) and $50 for White Wave (WWAV), both far superior companies when it comes to both growth and execution.
Now, some could say that Annie's is selling at depressed levels, given that there was a huge inventory overhang at the distributor level the last quarter and it had to absorb a 40% increase in the price of organic wheat. The company also bemoaned the competitive environment, even as we all know that one area of the food business that isn't all that competitive is the natural and organic space, as both Greg Engles, the chairman and CEO of White Wave and Irwin Simon, chairman, president CEO and founder of the Hain Group, have told me repeatedly. In fact both White Wave and Hain are trying to meet the demand of a variety of large stores, from Kroger (KR) to Wal-Mart (WMT) to Costco (COST) and of course Whole Foods (WFM) and the like.
In fact, I can't think of a better time to sell, because it just so happens that White Wave is expanding hard right into Annie's wheelhouse with a line of Horizon organic snacks to rival almost the whole non-frozen product line. One of the reasons I have been so positive on White Wave is because Engles isn't resting on his laurels. He's bought a terrific salad business, EarthBound farms, he's taking his plant-based drinks to China, where they are so much cheaper than traditional milk, and he's figured out how to leverage the Horizon brand beyond the slow growing milk category.
Hain, of course, has plenty of organic snacks of its own, although it's been moving in the direction of a full suite of soups, beverages, chips, yogurts, and, alas, looks a heck of a lot more like a natural and organic General Mills.
I have to presume that neither company was for sale, because I think at around $6 billion for White Wave and $5 billion for Hain, they represent much better bargains than Annie's. Then again, a few years ago they were a heck of a lot cheaper, unlike Annie's which peaked a little less than a year ago at $51 but had been in a prolonged downturn after the recent miscues and supply chain problems.
While Annie's is doing its partnering and maximizing its shareholder value, the company that should be shaking in its boots is Campbell Soup (CPB). Not only did it report a hideous quarter this morning, with the only bright spot being its tiny Bolthouse Foods organic business, but Annie's has always seen itself as the natural and organic competitor to Pepperidge Farm, with the Goldfish line perpetually in its crosshairs. I wonder if Foraker will allow Powell to blow out the whole snack section with Annie's White Cheddar Bunnies and the like, going head to head with all of the Pepperidge products.
Don't you think for a minute that Denise Morrison, the president and CEO of Campbell's, isn't worried. Anyone who starts off her conference call with the following quote: "our industry is now in a period of profound change and challenge, and there has been a meaningful decline in the performance of the packaged food sector," is definitely worried. She went on to say that "forces like the economic environment, the transformation of consumers' food preferences with regard to health and wellness, and their demand for greater transparency, the powerful social and demographic changes and the rise of e-commerce are all driving significant changes in consumer behavior with respect to food."
In other words, people have turned on canned and processed foods, which are, excuse the pun, the bread and butter of Campbell's. In an era of de-stocking the pantry it's Campbell's that's getting de-stocked and the delicious Bolthouse, the only line item that had actual growth although it is lumped in with food services, can't save the company.
The Annie's acquisition was, to me, just another nail in the coffin of a company that should have sold itself a very long time ago.
How high is the white flag being flown? I think that's best described by the hideous 15 million share secondary that Pinnacle Foods (PF), the maker of BirdsEye and Duncan Hines, filed on behalf of largest shareholder Blackstone (BX), which has a total of 60 million shares. Remember, Pinnacle tried to sell itself to Hillshire Brands, before that acquisition got busted up by Tyson Foods (TSN). If another suitor were a coming calling, Blackstone wouldn't have folded its tent on a quarter of the position. But who can blame them? Pinnacle is hardly organic and natural, but it does have veggies!
I think the Pinnacle sale is a fitting coda to a day that we may look back on and declare infamy for the packaged industry. The comeuppance of a tremendous company like General Mills at the hands of an upstart that's failed to deliver except for this sale, sandwiched between a hideous secondary and a horrendous Campbell's earnings report. It's most definitely the twilight of the pantry.