Post Will Not Stabilize Despite Its Sensible Acquisition

The positive trend of achieving quick growth through acquisitions has become the norm in many industries and the packaged food industry is one of them. Mergers and acquisitions are a costly but speedy way to achieve growth and enhance product range. Companies usually undertake acquisitions that are complementary to their existing business to penetrate deeper into the market rather than diversify into new businesses. A similar approach was followed by Post Holdings , a leading manufacturer, marketer and distributor of branded ready to eat cereals, when it recently acquired Premier Nutrition.

The details of the acquisition
The acquisition offers Post a platform to achieve expansion in the active nutrition and supplements businesses. Premier is currently in its high-growth phase. The company is a marketer and distributor of premium protein beverages and foods under its Premier Protein brand and nutritional supplements under its Joint Juice brand. Merging with Premier will provide Post an opportunity to enter this high growth and dynamic category of foods.

The financial impact

The company expects this deal to provide synergies in two areas: the core operations and the tax impact. This deal is projected to add nearly $130-$140 million to the company's top-line on an annual basis and approximately $17-20 million to its EBITDA, which stood at $204 million in 2012. On a per share basis, this acquisition will add $0.53 to the company's current EPS of $1.45.

Since Premier is currently operating at a loss, this will allow Post to utilize its losses to reduce its tax liability. Post has a net income (ttm) of $39 million, which can be offset against Premier's losses. The company forecasts the tax benefits to range in between $22-26 million on a net present value basis i.e. an immediate increase in shareholder value of $0.69 per share.

The payment of the deal will be made in cash, a total of $180 million. The company had cash and cash equivalents of $365.4 million on hand, as of March 31.

The current status of competitors
Kellogg is also a key player in this industry and an active rival of Post. The company recently introduced its first range of frozen soups-Moroccan Minestrone and Savory Chicken Noodle. In the quick meal segment, Kellogg is introducing new options specifically in the soup and steam meals.

Moreover, the company has also launched new breakfast products, e.g. hot cereals, bars, shakes, to cater to the customer's changing eating patterns as they turn more weight conscious. This is the company's first hot cereal in the U.S. and includes a certain proportion of fiber and protein. The availability of this convenient product will cater to the needs of 30 million Americans who skip breakfast on a daily basis. Also, there are reduced chances of metabolic syndrome with a cereal breakfast as it contains fiber and whole grain, according to recent research. This news is likely to boost the demand for Kellogg's current and new breakfast product range.

The sales achieved in the recent quarter were slightly lower than the planned target, especially in the U.S., but the company's continuous efforts to control costs has enabled it to counterbalance the adverse sales variance impact. The company acquired the brand Pringles, which has contributed positively to the company's financials. It is further anticipated to provide growth opportunities to the company.

Pepsi is another renowned name in the packaged food industry. The company operates nearly 700 manufacturing facilities worldwide and 100,000 distribution routes. It has a product portfolio that includes 22 brands that generate more than $1 billion each in annual retail sales.

Recently, the company entered into a multi-year sponsorship agreement with Manchester United in Asia. This will allow Pepsi to use the football club's label on its products. The club has a huge fan base of greater than 38 million in this region. This agreement is expected to open up new growth opportunities and expand its outreach in the Asian continent. This is likely to boost the company's profits immensely.

Frito-Lay and Activision have joined forces for the promotion of Skylanders Giants, where fans can score exclusive, limited-edition Skylanders Giants Sidekicks figures by buying specially marked Frito-Lay 20-count variety packs of snacks and entering the in-pack code online. Skylanders was one of the best selling games of 2012. This agreement is likely to boost the demand for Frito-Lay quite significantly.

The company expects to return approximately $6.4 billion to shareholders through dividends and share repurchases in 2013.

Conclusion
Although Post has made a sensible acquisition, it is less likely to turn the tables for the company as it is already overvalued. Post's P/E (ttm) stands at 41.2 times as compared to the industry average of 20.1 times. Also, the company has been registering a very low return for its shareholders representing an inefficient management of funds. The company's ROE (ttm) and ROA (ttm) stand at 2.8% and 1.3% as compared to the industry average of 21.6% and 7.4%, respectively. Hence, I think your money might be better invested elsewhere.

Though Kellogg has employed a high amount of leverage, it is utilizing it quite effectively to generate returns more than the cost of funds. It is evident from the company's high ROE (ttm) of 38% as compared to the industry average of 21.6%. The company provides its shareholders a regular stream of dividend income and is expected to increase dividends by 2.3% in 2013. In my opinion, this stock could be a good addition to your portfolio.

Pepsi is a financially sound company with multiple brands under its umbrella. Considering its recent agreements, the company is likely to see a phenomenal boost in the demand for its products. Also, the company has been providing its shareholders with a constantly rising dividend income and is expected to raise dividends by 1.56% in 2013. Though this might seem to be a small increment, the company is generating a high ROE (ttm) of 30.7% compared to the industry average of 26.2%. A major chunk of the return can be expected in the form of price appreciation. Hence, this stock should also be bought in my opinion. Have a look, you might also come to the same conclusion.

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The article Post Will Not Stabilize Despite Its Sensible Acquisition originally appeared on Fool.com.

Awais Iqbal has no position in any stocks mentioned. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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