American’s deep affection for their pets is spurring a wave of mergers and acquisitions in which companies that specialize in food for humans are adding pet food and pet-care brands to their portfolios.
J.M. Smucker Co.’s SJM, +0.76% acquisition of Ainsworth Pet Nutrition, a premium pet food company best known for the Rachael Ray Nutrish line, is the latest in a string of recent purchases in the pet-care space. The $1.9 billion deal is being offset by an estimated $200 million tax benefit, according to the deal announcement late Wednesday.
In February, General Mills Co. GIS, +0.77% announced it was buying Blue Buffalo Pet Products Inc. for a whopping $8 billion.
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And on Thursday, Minerals Technologies Inc. MTX, -0.29% said it will purchase Sivomatic Holding B.V., a European manufacturer of premium cat litter. Terms of the transaction weren’t disclosed, but Sivomatic sales were €73.0 million, or about $89.3 million, in 2017, the announcement said.
“Pet food and pet snacks has become the largest center-of-the-store category in the U.S. food and beverage market, generating over $30 billion in annual retail sales across all channels, and remains one of the fastest-growing categories,” J.M. Smucker wrote in its announcement.
Nielsen has also highlighted the opportunities in the pet food market as more pet owners “humanize” their pets and seek out premium pet-care products.
“This acquisition and the addition of the high-growth Nutrish brand will increase the scale and further accelerate the growth profile of the company’s pet food business,” J.M. Smucker said.
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However, just because there’s a large market for these products doesn’t mean all companies will fare equally well.
“The key difference between J.M. Smucker and the recent General Mills pet food deal is that J.M. Smucker is already established in the space, so we see relatively lower integration risk,” James Dunn, analyst at research firm CreditSights, wrote in a note.
CreditSights upgraded J.M. Smucker’s bonds to market perform from underperform on the news, and said they would provide a potential deleveraging play in the mid-BBB space, referring to the company’s credit rating. The firm rates General Mills’ notes at outperform.
J.M. Smucker already has the Nature’s Recipe pet food brand in its portfolio.
“We have long loved the pet category and Nutrish has been one of the fastest-growing brands in the category,” wrote Jefferies equities analysts led by Akshay Jagdale. However, it’s a “steep” price, and “J.M. Smucker will have to work hard to extract value from the deal.”
Jefferies rates J.M. Smucker shares buy with a $135 stock price target.
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J.P. Morgan analysts also raised a flag on the price, although it’s considerably less than what General Mills paid for Blue Buffalo.
“[T]he Rachael Ray brand’s growth in measured channels has decelerated lately despite an increased percentage of sales on promo, which raises the question of whether J.M. Smucker is buying the asset at its peak,” they wrote in a note.
The analysts also questioned whether the tax benefit, $50 million in one-time costs, and other items should be included or excluded from the price analysis.
J.P. Morgan rates J.M. Smucker shares at neutral.
Along with the acquisition news, J.M. Smucker also announced that it could sell off its baking business after a strategic review. That business includes the Pillsbury and Hungry Jack brands.
“Baking has been a difficult category often marked by significant price competition, and measured channel trends suggest a high-single-digit to low-single-digit sales decline for these businesses,” wrote Stifel analysts. “We do not believe the Smucker’s baking business could stand alone suggesting a sale is likely—either to private equity or a strategic acquirer.”
Stifel has a hold rating on J.M. Smucker shares with a $133 target price.
J.M. Smucker stock is up 0.4% in Thursday trading, but down 4.5% for the last year. The S&P 500 index SPX, -0.61% has rallied 13.5% for the past 12 months.
The company’s most-active bonds, the 2.200% notes that mature in December of 2019, tightened about 4 basis points to 58 basis points over comparable Treasurys, according to trading platform MarketAxess. The company’s 10-year notes, the 3.375% notes due in December of 2027, were five basis points tighter at 117 basis points over Treasurys.
