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| Source: | LOHAS Weekly Newsletter |
| Published: | Monday, November 01, 1999 |
On Oct. 25, Kellogg announced that it will debut a soy protein-based cereal at some point in the near future that will comply with FDA’s new soy protein health claim (see story, pg. 2).
WFDS manufactures products such as veggie burgers and meatless chicken, sausage and hot dogs marketed under several brands including Morningstar Farms and Loma Linda.
“By acquiring Worthington, we have become a leader in meat alternatives, and we believe this acquisition fits our core competencies extremely well,” Kellogg’s President and CEO Carlos Gutierrez said in a recent conference call with analysts.
Dale Twomley, president of WFDS, says that Worthington had positioned itself as not for sale despite several inquiries, “[but] in carrying out the fiduciary responsibilities [for the company], when Kellogg calls, you have to answer the door.”
During negotiations, Twomley became convinced of Kellogg’s commitment to the meatless alternatives category, and he believes that WFDS’s long-term goals are in better hands with Kellogg. Twomley sees the acquisition as a win for WFDS shareholders, customers and employees. WFDS is being sold to Kellogg for more than 12 times its anticipated FY99 EBITDA of $25
million.
Gutierrez thinks the price is worth it. “We are buying a growth company,” he says. “Worthington has grown sales at 17.5% and earnings at more than 15% over the last five years, and there is still substantial growth to be had—penetration is still only 15%.” Gutierrez adds: “Cost synergies alone will pay for the premium that we have in turn paid for this company. [We] went into due diligence with this in mind.”
The meatless alternative category has had a compound growth rate in U.S. dollars of more than 40% in the last five years, according to Gutierrez. In comparison, the mainstream food industry’s overall growth rate is between 1% and 2% a year. Going forward, Kellogg is taking a conservative approach and assuming sales growth of 12% to 15% for WFDS—the same growth rate the company looks for in its other noncereal
businesses.
Kellogg expects that the acquisition of WFDS will be neutral to its FY99 and FY00 financial statements and should be accretive on a cash EPS basis in FY01. The acquisition will be accretive to EPS, including amortization in FY02, the company believes.
As part of the deal, Kellogg will take on $40 million of WFDS’s debt. WFDS had FY98 sales of $139.5 million, up 18% from FY97 sales of $117.9 million, and FY98 net income of $8 million or $.66/diluted share. WFDS expects FY99 sales of approximately $175 million. Kellogg had FY98 sales of $6.76 billion and FY98 net income of $502.6 million.
On the announcement of the deal on Oct. 1, Josephthal Lyon & Ross cut Kellogg to Sell from Buy. But that same day WFDS soared $8.69/share to close at $23.06/share on the Nasdaq. Kellogg slipped $.31/share to close at $37.13 on the NYSE.
The significance of the acquisition “depends on whether you’re a Kellogg or a Worthington Foods shareholder,” says Jim Barrett, a consumer durables analyst in the New York office of Josephthal. “It’s good news for Worthington shareholders.”
The impact of this acquisition on WFDS’s competitors should be significant. “It changes the landscape to have a multibillion-dollar food company come into the category,” says Twomley.
Industry sources tell Barrett that Gardenburger (GBUR) is being shopped. “The competitive posture of the two companies has shifted,” Barrett says. “Kellogg has deeper pockets, [and] GBUR’s need to find a buyer has heightened.”
Both Kellogg and WFDS expect the transaction to be completed by year’s end. If the deal is not completed by March 31, 2000, Kellogg may cancel its offer, and should WFDS accept an offer from another party, it will have to pay a $12.5 million termination fee.
According to Barrett, factors motivating the larger U.S. foods makers’ interest in natural foods include a dearth of companies left to acquire due to retail-channel consolidation, high multiples, years already spent reducing costs, and lack of flexibility with retailers. “What’s surprising is they didn’t look at Worthington before,” he says.