Hostess Brands Inc. (TWNK, Financial) shares soared following the announcement of its acquisition by J.M. Smucker Co. (SJM, Financial) on Sept. 11.
Smucker, which is known for its jams and jellies, is looking to expand into an area where Hostess dominates. The company produces and sells various kinds of sweet snacks, such as cakes, cookies and wafers. The company was founded in 2013 after acquiring some of the assets of the former Hostess Brands Inc., which had gone bankrupt.
The company faced bankruptcy twice, once in 2004 and then in 2012. In 2012, Hostess’ bankruptcy was due to unsuccessful negotiations with its workers' union. However, in 2013, investment firms Apollo Global Management and Metropoulos & Co. stepped in to rescue the company from the brink of insolvency. The company was listed on Nasdaq again in 2016.
Operations and products
Hostess Brands operates several bakeries in the U.S. and also owns a Canadian subsidiary named Voortman Cookies Ltd. Some of its most popular products are Hostess Donettes, Twinkies, Cupcakes, Ding Dongs and Zingers. The company has also made some acquisitions and divestitures over the years, such as buying Superior Cake Products in 2016, selling it to Sara Lee Frozen Bakery in 2019 and buying Voortman Cookies in 2019.
About Smucker
As for Smucker, it is a leading manufacturer and marketer of consumer food and beverage products in North America. The company produces and distributes a wide range of products, including jams, jellies, preserves, peanut butter, coffee, pet food and snacks. Organized into four strategic segments—U.S. Retail Coffee, U.S. Retail Consumer Foods, U.S. Retail Pet Foods and International and Away From Home—Smucker's array of brands, including household names like Smucker's, Folgers, Jif and Dunkin, serve a wide market.
Details of the acquisition deal
In a strategic move aimed at expanding its brand portfolio, Smucker has sealed a deal to acquire Hostess for approximately $5.6 billion, which translates to $34.25 per Hostess share. This transaction carries a remarkable 54% premium over Hostess' closing stock price on Aug. 24, when takeover rumors initially surfaced.
Shareholders of Hostess can anticipate a compensation package consisting of $30 in cash and 0.03002 shares of Smucker common stock for each share of Hostess common stock they hold. Smucker anticipates finalizing this acquisition in the third quarter of the current fiscal year ending April 30, 2024, signaling the company’s strategic goal to capitalize on the evolving landscape of the packaged food industry.
M&A trends in the U.S. packaged food industry
Smucker was not the only company interested in Hostess; other major players in the food and beverages industry, such as PepsiCo Inc. (PEP, Financial), Mondelez International Inc. (MDLZ, Financial) and General Mills Inc. (GIS, Financial), were also interested. This coincides with a recent surge in deal activity within this sector, as companies seek to revamp their product offerings in response to slowing demand for their traditional brands and declining gains from price hikes. Campbell Soup Co. (CPB, Financial), for instance, recently sealed a deal worth $2.7 billion to acquire Sovos Brands, which is known for Rao's sauce. Unilever (UL, Financial) also expanded its reach by acquiring Yasso, a premium frozen yogurt brand in North America.
Although the overall value of deals in the U.S. food and beverage industry has dipped slightly this year to about $10.39 billion according to LSEG data, the number of deals has surged by 17.5% to reach 248 as of Sept. 1. In contrast, the total number of deals across all industry sectors has declined by 4% over the same period.
Hostess Brands' growth and market outlook
By the end of 2020, Hostess Brands had executed a remarkable transformation of its product portfolio, achieving a significant milestone by crossing the coveted $1 billion revenue threshold. This achievement marked a significant milestone in the company's relentless efforts to reinvent itself in the highly competitive consumer food sector. Hostess exhibited its ability to maintain revenue growth in the face of difficult market conditions, at times resorting to pricing hikes as sales volumes were impacted.
In the second quarter, the company continued its upward trajectory, reporting net revenue of $352.4 million, registering a 3.5% year-over-year increase. Notably, this growth was driven by a 10.4% boost contributed by price mix adjustments, effectively counterbalancing any volume dips experienced during the quarter. Gross profit increased by 11.8% to reach $126 million. Further, the company reported a remarkable 16.1% increase in adjusted Ebitda, reaching a notable $80 million, with adjusted Ebitda margins demonstrating an expansion of 247 basis points to 22.7%.
The company's positive momentum gained notable traction in July, characterized by a substantial increase in shipments compared to the prior year. As highlighted by the management during the earnings call, the boost was fueled by strong customer support for strategically advantageous shelf resets and an effective back-to-school merchandising program. The company’s Sweet Baked Goods segment reported a 2.9% increase in point-of-sale dollars during the quarter, further underscored by a remarkable 18.5% growth when analyzed on a two-year cumulative basis. The Voortman brand also delivered notable gains, with a 7.2% increase in point-of-sale figures, including an impressive 13.1% growth for the recently rebranded Voortman Zero Sugar range of cookies and wafers.
Snacking habits and market trends
In a testament to the enduring popularity of snacking, particularly sweet indulgences, consumer preferences have remained remarkably resilient even amid the challenges posed by the current economic environment. According to a Statista survey, 62% of respondents in the U.S. reported snacking once or twice a day, with nearly 11% of respondents stating that they snack three times a day or more. These findings align with broader market trends, as evidenced by a Wall Street Journal report indicating an impressive 11% growth in packaged snack sales, surging to a substantial $181 billion in 2022. In 2023, the snack food market revenue is expected to hit $110.3 billion and is expected to grow at a compounded annual rate of almost 4%. This growth starkly contrasts with the slower growth observed in various other food categories, reaffirming the snack industry's robust position in the evolving consumer landscape—a position Hostess Brands is capitalizing on effectively.
Conclusion
The recent announcement of the proposed acquisition has sent Hostess Brands' shares soaring and signifies a pivotal moment in the snack industry. The company’s impressive financial performance and the enduring popularity of snacking in the U.S. demonstrate its strategic relevance. With the snack food market's strong revenue and growth prospects, it is clear that consumer preferences for convenient, indulgent snacks remain robust even amid macroeconomic pressures. This acquisition aligns with broader industry moves to adapt to changing tastes and economic conditions, positioning both Hostess Brands and J.M. Smucker at the forefront of this evolving landscape.
