I am a 50-year shareholder of J.M. Smucker (SJM) and I have seen them make some great deals (Folgers Coffee $3.3 billion in 2008) and some horrible deals (Big Heart Pet Brands $5.3 billion in 2015), but their planned $5.6 billion acquisition of Twinkie maker Hostess Brands (TWNK) takes the cake. This deal is dumb on strategic and valuation grounds and family scion Paul H. Smucker is probably turning over in his grave.
It staggers the mind too think that when the sweetened snack industry is being riled by the prospect of a new class of weight loss drugs that will drive a dagger into the industry's business model, SJM decides to pay a huge premium (54% price unaffected) for TWNK, perhaps the most vulnerable company in that sector.
Compounding the strategic mistake SJM is paying a huge 17X EBITDA on 2023 numbers and an estimate 13X on SJM's estimate (aggressive in my opinion) of 2024 results allowing for synergies. To me it makes no sense for SJM which was trading at 11X EBITDA to buy a far worse business at 17X EBITDA. Further SJM compounds the problem by levering up to the gills with planned financing approximating $5 billion. That borrowing with raise its Debt/EBITDA ratio from a modest 2.2X to a junk level 4.5X. Simply put, expect SJM's P/E ratio to contract. It is no accident that SJM is trading down 7% intraday.
No comments:
Post a Comment