Following the prior years’ acquisitions of Clover and Pioneer Foods by foreign investors and the current Heineken bid for Distell, last week AVI announced that Mondelēz International is in discussions to acquire its Snackworks division.
While this put an end to speculation as to the cautionary hanging over AVI shares on the JSE, the market was also disappointed and slammed the stock down a couple of percent.
Investors may be asking themselves: Why? How much could Mondelēz pay for this business? Could there be upside in AVI’s price from this? And what will AVI look like afterwards?
These are all good questions, and I will attempt to answer each one.
What will AVI look like afterwards?
AVI’s Snackworks (owner of Bakers, Provita and Willards) is a major contributor to the group’s profits (34% of FY2021 operating profit) and has done so with the second highest long-term growth rate in the group.
Only the group’s fishing interest, I&J, has grown profits faster than Snackworks. But, importantly, I&J has done so with much higher volatility and lower reliability than Snackworks, thus making Snackworks (excuse the pun) the bread and butter of the group’s bottom line.
What I am saying is that post-Snackworks, AVI is a lower-quality, less-reliable collection of businesses.
From lumpy I&J to struggling footwear and apparel, a post-Snackworks AVI will be heavily reliant on Entyce (teas and coffees) to perform.
Some of the speculation around the cautionary was that AVI could be acquired in its entirety and delisted. Thus, some of the negative market reaction to the news that Mondelēz is only looking at the group’s Snackworks division is likely due to disappointment that shareholders might be left holding the balance of the group.
How much could Mondelēz offer for Snackworks? What is Snackworks worth?
I have tried to calculate this in three different ways:
1. Relative to a very recent similar cash-neutral, debt-neutral acquisition (Unilever’s sale of Lipton):
- Unilever sold Lipton for €4.5 billion with sales of around €2 billion, thus on an enterprise value (EV) to sales ratio of 2.3x. While tea is different to snacks, it does give us a nice private equity view of valuation with an added control premium thrown in.
- Snackworks sales are around R4.3 billion, thus a 2.3x EV/sales implies an EV fair value of 2 850c per AVI share for Snackworks.
2. Relative to Mondelēz International itself:
- Mondelēz’ shares are trading on a 19.5x price-earnings (PE) ratio.
- Logically, the group would not want this acquisition to be too dilutive, thus its own multiple is a bit of a ‘ceiling’ for what it may pay for Snackworks.
- Applying this PE to a debt-neutral view of Snackworks’s profits implies a fair value of 3 396c per AVI share for Snackworks.
3. What AVI’s own share price implies Snackworks’s fair value is:
Using JSE-listed comparatives, I’ve valued AVI’s other divisions:
- Entyce: Worth around 3 022 cents per AVI share
- I&J: Worth around 766 cents per share (cps)
- Personal care: Worth around 363 cps
- Footwear and apparel: Worth around 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 divisions (after net debt) are worth around 4 357 cents per AVI share (3 022+766+363+718-512), then the market is currently ‘valuing’ Snackworks at around 3 743 cents per AVI share (8 100-4 357).
These three matchbox 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 upside in the AVI share from here (based on this deal)?
Nothing is impossible, but upside based solely on Mondelēz buying Snackworks appears unlikely.
With a range of fair values for Snackworks of between 2 850 and 3 743 cps, AVI’s fair value appears to be worth between its current market price and nearly 11% lower.
This is assuming no control premium is paid for Snackworks, though we also do not take any capital gains tax considerations from AVI’s side into account either.
Conclusion: The market is rightly disappointed
If AVI sells its crown jewel, Snackworks, it is unlikely to get a price sufficiently high to unlock material value in the current share price.
On top of that, a post-Snackworks AVI should be a lower-quality group with more volatile earnings and, likely, demand a lower multiple with less liquidity. None of these things are a positive.
Thus, knowing only what we know now, I think the market was right to sell AVI’s share price down on the news of the discussions. It and its implications were quite disappointing to AVI shareholders.
Keith McLachlan is investment officer at Integral Asset Management.