ORRVILLE, OHIO — The stock price for the J.M. Smucker Co. dropped after the company announced it planned to acquire Hostess Brands, Inc. for about $5.6 billion, but at least two sources spoke positively about the pending transaction.
The J.M. Smucker price on the New York Stock Exchange closed at $131.66 per share on Sept. 11, the day the transaction was announced, which was down from a previous close of $141.58 on Sept. 8. By the close of Sept. 13, the stock price had fallen to $128.41 per share, down 9% from Sept. 8.
BofA Global Research downgraded J.M. Smucker shares to “neutral” on Sept. 14. BofA previously rated the company as “buy” based on the view J.M. Smucker would focus on a more optimized portfolio of core brands after divesting low growth/margin assets for several years, said Peter T. Galbo, research analyst for BofA. Hostess Brands would add complexity and introduce risk to J.M. Smucker, which has a mixed history in mergers and acquisitions, he added. J.M. Smucker spent $7.7 billion to enter the pet food category through Big Heart Pet Brands in 2015 and Ainsworth Pet Nutrition in 2019 but sold off over 60% of this segment for about $1.3 billion over the past two years.
Potential revenue synergies exist if Hostess Brands can help J.M. Smucker brands like Uncrustables enter new channels like convenience stores, Mr. Galbo said.
London-based Cowen and Co. LLC still rated the Orrville-based J.M. Smucker Co. as “outperform” in a research report on packaged foods released Sept. 12.
“We believe the improvements Smucker has made to its commercial model and its advantages in attractive categories (coffee, pet snacks, dry cat food and frozen sandwiches) have boosted its growth rate to 3% to 4%,” Cowen and Co. said. “In addition, we think the market underestimates management’s ability to effectively integrate the Hostess acquisition and generate revenue synergies.”
Cowen and Co. rated Hostess Brands, Lenexa, Kan., as “market perform,” citing the company’s competitive advantages in sweet baked goods, pipeline of innovation and marketing insights. Cowen and Co. expects capacity expansion will bring volume growth and market share rebound for Hostess in 2024. The stock price for Hostess Brands on the Nasdaq closed at $33.50 per share on Sept. 13, which was up 19% from a close of $28.11 on Sept. 8.
The Smucker-Hostess deal was not surprising, said Geoff Coltman, vice president, client engagement, for Chicago-based Catena Solutions, which consults companies going through mergers or acquisitions.
“This expands and transforms their portfolio of items to bring them into a completely different market (convenience stores),” he said of J.M. Smucker.
Integrating the two companies into one will take time.
“I don’t think you’re going to see employment change for a while,” he said. “I don’t think you’re going to see the removal of duplication of roles until (J.M. Smucker figures) out how fast they can integrate those businesses or keep them as a standalone.”
He said he is eager to see how the transaction affects product development: jelly might appear in chocolate cupcakes or chocolate could appear in Smucker Uncrustables.
“In my opinion you’re going to start to see the Hostess items through innovation start to merge with other SKUs and brands (owned by J.M. Smucker),” Mr. Coltman said.
Mr. Coltman said he expects more mergers and acquisitions to follow in the food and beverage industry.
“In my opinion, the larger brands — the Cokes, the Smuckers, the Mondelez, the Mars — it’s all in their strategic plan to acquire,” he said.
The large brands are facing headwinds in new product launches from smaller companies and more consumers purchasing healthy products.
“I think we’re going to see acquisitions accelerate in the foreseeable future with the larger brands buying new products that hit the market,” he said.
The Cowen and Co. report mentioned healthier products, too.
“Entrepreneurial companies like Kind, Chobani, Freshpet and Annie’s have capitalized on changes in consumer attitudes and disrupted food categories by introducing healthier options,” the company said. “Online retailing and social media made it easy for them to gain awareness without having to spend hundreds of millions of dollars on traditional media. From a production standpoint, food processing is a relatively low-tech industry with a multitude of third-party manufacturing capacity for entrepreneurial companies to utilize. Barriers to entry in this industry are relatively low.
“The ‘big food’ companies reacted to these consumer trends by reformulating their legacy brands with fewer artificial ingredients and colors, but they found it difficult to change preconceived notions about what their brands stand for.”