We added short BNNY to the Best Ideas list on 4/7/2014 at $37.16/share. Since this time, FY15 EPS estimates have been revised down from $1.13 to $0.90. However, we knew the biggest risk to our thesis was a potential takeout by a much bigger player in the food space. Last night, this happened.
Yesterday, GIS agreed to buy BNNY for $820 million or 3.3x NTM sales and 24x NTM EBITDA. We understand why GIS would be inclined to acquire BNNY. Annie's is a strong brand that will benefit from being a part of the GIS distribution machine.
The downside of having shorts in the market, and especially in the consumer staples space, is excess liquidity and large companies, such as GIS, starving for growth. The question now is when will K or CPB make a transformation acquisition, if at all? We wouldn’t view the BNNY acquisition by GIS as a transformation, but rather a slight act of desperation. With $200 million in revenues and $28 million in EBITDA, BNNY is a rounding error to the financial performance of GIS. The only way GIS can make this deal look good is by excluding transaction expenses associated with it – otherwise, the deal is dilutive to GIS shareholders.
GIS is looking to the convenient meals and snacks category to help diversify its product portfolio. The acquisition does not help solve the issues the company is having with its core cereal business.
Obviously, the deal will highlight HAIN and BDBD as other potential targets in the organic space. While BDBD is a company with a strong brand (Udi’s) in the organic space, HAIN is a conglomerate with an unconventional business model. This makes HAIN, in our view, an unattractive and complicated potential acquisition. At the very least, we know the GIS will not be buying HAIN anytime soon!