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Post: A Man And His Renoir

One of the names we’ve been focused on, but have not yet written on is Post Holdings Inc.  It is a well-managed company that is determined to transform its business into high growth categories.  That being said, today’s announcement that it is acquiring Michael Foods is not consistent with where we thought the company was going.  In our view, processed eggs, refrigerated potatoes and cheese products is far from the active healthy category we believed the company was perusing.

POST’s proposed acquisition of Michael Foods will cost them $2.45 billion or 1.3x trailing sales, a significant premium to the group at 1.0x.  While the acquisition gives the company “a platform to compete beyond its cereal and healthy snack categories,” management didn’t address the deviation from its original strategy.  This makes POST a direct competitor with other protein companies, such as Tyson Foods which trades at 0.4x sales versus POST at 1.6x.  We understand how the math works on this transaction – it is the longer-term strategy that we are questioning.

According to the company, “it has great possibilities to leverage this Post name.”  This statement was mildly confusing to us.  To be frank, we don’t know what Post brand name carries beyond the cereal category.  POST does own some active nutrition brands, but it is far from active nutrition in the minds of consumers.

William P. Stiritz, Chairman and Chief Executive Officer of POST, called the Michael Foods acquisition “really a unique, rare opportunity,” saying, “I’ve been in the business for over 50 years and this is, this one stood out.”  He went on to compare it to buying a Renoir: “you keep looking for these things because they come along so rarely.”

The analogy of Renoir and competing in the ultra-competitive and cyclical protein category of processed eggs is lost on us.

According to management, the company is investing behind “very large secular themes” around the increased consumption of protein and the away-from-home break occasion.  On the surface, those seem more like themes to justify the acquisition rather than secular themes around active healthy nutritional products.

Processed eggs are not a healthy alternative to organic fresh farm eggs.  Today, the USDA’s Food Safety and Inspection Service announced that Nutriom, LLC, based in Lacey, Wash., has recalled an additional 82,884 pounds of processed egg product because of possible Salmonella contamination.  While this is not a Michael Foods' product, it will certainly not help the consumer perception of processed eggs.

We continue to search for good ideas on both the long and short side of the consumer staples sector and POST has now moved to the top of our list.  We believe management is taking on a lot of risk with this acquisition, but we bet the imminent equity raise will be oversubscribed.

We are digging deeper into the POST story.

Howard Penney

Managing Director

Matt Hedrick

Associate

Fred Masotta

Analyst