Following previous years’ acquisitions of Clover and Pioneer Foods by foreign investors and Heineken’s current bid for Distell, AVI announced last week that Mondelēz International is in talks to acquire its Snackworks division.
Read: It is said that Mondelēz will consider an offer for AVI
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While this put an end to speculation about the caution weighing on AVI’s shares on the JSE, the market was also disappointed, knocking the shares down a couple of percent.
Investors may ask: Why? How much could Mondelēz pay for this business? Could there be price advantages for AVI for this? And what will AVI look like afterwards?
These are all good questions, and I will try to answer all of them.
What will AVI look like afterwards?
AVI’s Snackworks (owner of Bakers, Provita and Willards) is a major contributor to group earnings (34% of fiscal 2021 operating profit) and has done so with the group’s second highest long-term growth rate .
Only the group’s fishing interest, I&J, has increased profits faster than Snackworks. But more importantly, I&J has done it with much higher volatility and lower reliability than Snackworks, which is why Snackworks (excuse the pun) is the bread and butter of the group’s results.
What I’m saying is that after Snackworks, AVI is a lower quality, less reliable business collection.
From lumpy I&J to struggling footwear and clothing, a post-Snackworks AVI will rely heavily on Entyce (teas and coffees) to function.
Some of the speculation surrounding the warning was that AVI could be purchased in its entirety and delisted. Therefore, part of the negative market reaction to the news that Mondelēz only If you look at the Snackworks division of the group, it is likely due to disappointment with shareholders getting the rest of the group.
How much could Mondelēz offer for Snackworks? How much is Snackworks worth?
I have tried to calculate this in three different ways:
1. In relation to a similar acquisition, cash neutral and debt neutral, very recent (Sale of Lipton by Unilever):
- Unilever sold Lipton for € 4.5 billion with sales of around € 2 billion, hence an enterprise value (EV) to sales ratio of 2.3 times. While tea is different than snacks, it gives us a good insight into private equity valuation with an added control premium.
- Snackworks sales are around R4.3 billion, so an EV / sales of 2.3x implies an EV fair value of 2,850c per AVI share for Snackworks.
2. In relation to Mondelēz International itself:
- Mondelēz shares are trading at a price-to-earnings (PE) ratio of 19.5x.
- Logically, the group would not want this acquisition to be too dilutive, so its own multiple is a ‘ceiling’ for what it could pay for Snackworks.
- Applying this PE to a neutral view of Snackworks earnings implies a fair value of 3,396 cents per share of AVI for Snackworks.
3. What AVI’s share price itself implies that Snackworks’ fair value is:
Using benchmarks listed in JSE, I have assessed the other divisions of AVI:
- Entyce: Worth around 3,022 cents per AVI share
- I&J: worth around 766 cents per share (cps)
- Personal care: about 363 cps
- Footwear and clothing: Approximate value of 718 cps
- Group net debt of around 512 cents per AVI share.
If AVI’s share price is around 8,100 cps, and if the other splits (after net debt) are worth around 4,357 cents per AVI share (3,022 + 766 + 363 + 718-512), then the Market is currently ‘pricing’ Snackworks at around 3743 cents per AVI share (8100-4 357).
These three matchbook calculations indicate that Snackworks is likely to be worth between 2,850c and 3,743 cents per AVI share (on a cash and debt neutral basis).
Could there still be advantages to the AVI stock from here (under this agreement)?
Nothing is impossible, but benefits based solely on Mondelēz’s purchase of Snackworks seem unlikely.
With a range of fair values for Snackworks between 2,850 and 3,743 cps, AVI’s fair value appears to be between its current market price and almost 11% lower.
This assumes that a control premium is not paid by Snackworks, although we also do not take into account any capital gains tax considerations by AVI.
Conclusion: the market is rightly disappointed
If AVI sells its crown jewel, Snackworks, it is unlikely to fetch a price high enough to unlock material value at the current share price.
On top of that, a post-Snackworks AVI should be a lower-quality pool with more volatile earnings, and probably demand a lower multiple with less liquidity. Neither of these things is positive.
Therefore, knowing only what we know now, I believe that the market did well to sell the AVI share price lower on the news of the discussions. This and its implications were quite disappointing for AVI shareholders.
Keith McLachlan is Chief Investment Officer at Integral Asset Management.