Large MOM multiples

by Josh Sosland
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ST. LOUIS – The $1.15 billion to be paid by Post Holdings, Inc. for MOM Brands Co. equates to 140% of annual MOM sales, 46 times 2013 net income and 11 times 2013 adjusted EBITDA.

Financial data on MOM Brands, a privately held company, and details about the acquisitions were included in a Form 424B5, a prospectus, submitted Jan. 26 to the Securities and Exchange Commission in connection with a secondary offering of Post Holdings shares.

The prospectus was filed the same day Post said it had reached an agreement to acquire Minneapolis-based MOM Brands. MOM is a maker of ready-to-eat cereal under such brand names as Malt-O-Meal, Golden Puffs, Cinnamon Toasters and others.

“MOM Brands sells its products to grocery stores, big box retailers, and food service distributors across the United States, Puerto Rico, Canada, Mexico, and the Caribbean,” Post said in the filing. “In June of 2012, MOM Brands acquired the CoCo Wheats brand of chocolate flavored hot wheat cereal to add to its hot cereal category. Beginning in the third quarter of calendar year 2014, MOM Brands partnered with Weight Watchers to manufacture and distribute Weight Watchers licensed cereals, and MOM Brands also produces private label products for grocers such as Wegmans, Meijer, and Food Lion.”

The dependence of MOM, and to a lesser degree Post, on a small number of retailers for a large proportion of the companies’ business, creates risks for the pending transaction, Post said in the filing. Wal-Mart Stores, Inc. accounts for more than a third of MOM Brands sales.

“A limited number of the same customers represents a large percentage of our and MOM Brands’ respective net sales,” Post said in the filing. “Our largest customer, Wal-Mart, accounted for approximately 11% of our consolidated net sales in fiscal 2014, including approximately 24% of Post Foods’ net sales in fiscal 2014. Wal-Mart accounted for approximately 36% of sales for MOM Brands for the 12 months ended Sept. 30, 2014; with MOM Brands next largest customer comprising approximately 7% of sales for the same period. The success of our businesses depends, in part, on our ability to maintain our level of sales and product distribution through high-volume food distributors, retailers, super centers and mass merchandisers.”

Net income of MOM Brands in 2013 totaled $25.4 million on sales of $794.6 million. The company’s gross margin was $227.7 million, or 29% of sales.

In the nine months ended Sept. 27, 2014, MOM Brands net income was $33.4 million, nearly unchanged from $33.3 million in the first nine months of 2013. Net sales in the first three periods of 2014 were $560.4 million, down 9% from $615.5 million. Adjusted EBITDA in the first nine months of 2014 was $90 million. In the prospectus, Post estimated 2014 adjusted EBITDA for MOM Brands at $119 million to $121 million for the full year of 2014.

As of Sept. 27, MOM Brands long-term debt totaled $143.6 million, down $100 million from $244.3 million a year earlier.

Over time, Post Holdings expects to achieve significant cost savings following the MOM acquisition, the company said in the prospectus.

“We expect to recognize approximately $50 million in run-rate cost synergies by the third full fiscal year following the closing of the acquisition resulting from infrastructure rationalization, shared administrative services, and improved leverage within the combined sales force,” Post said in the S.E.C. filing. “We estimate that the one-time costs incurred to achieve these expected synergies will be between $70 million and $80 million. This $50 million of projected cost savings is not included in Pro Forma Adjusted EBITDA. Although we currently expect to receive at least a $50 million benefit, there can be no assurance that we will realize the anticipated synergies.”

That the MOM transaction would represent the acquisition of a mature player in a mature business also was acknowledged in the filing.

“The ready-to-eat cereal category has experienced weakness in recent years, and we expect this trend to continue,” Post said. “Although we expect to achieve significant synergies in connection with our MOM Brands acquisition, continuing weaknesses in the R.-T.-E. category, or the weakening of our or MOM Brands’ major products competing in this category, could have a material adverse impact on our business.”
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