NEW YORK — “Compelling strategic rationale” exists for a potential acquisition of Hostess Brands, Inc., according to Morgan Stanley & Co, LLC, a New York-based investment management firm. The firm issued a 24-page research report on the potential acquisition after reports circulated late last week that Lenexa, Kan.-based Hostess may be entertaining offers.

“(Hostess) offers attractive top-line growth through its pure-play exposure to the growing US sweet snacks category and opportunities for international expansion,” Morgan Stanley said.

Morgan Stanley said it has no knowledge of a potential transaction or commentary from the potential suitors, but has reported on an expected ramp-up in merger and acquisition activity in the packaged foods sector. In the case of Hostess, several factors make the company attractive, Morgan Stanley said.

“We see several strategic benefits from a potential (Hostess) acquisition, including: exposure to the relatively attractive higher-growth sweet snacks category; (Hostess’) iconic brand portfolio, which has a strong market share position in the category; access to (Hostess’) expanded manufacturing capabilities as its Arkadelphia (Ark.) facility comes on line this year; opportunity to expand the brand internationally; and potential for cost synergies,” Morgan Stanley said.

The investment firm said Hostess has delivered solid organic top-line/EBITDA CAGR from 2018-22 supported by category growth and strong management execution. Additionally, the company’s innovation pipeline focused on expansion into breakfast and its acquisition of Voortman cookies and wafers have buoyed the business. But more recently Hostess has lost some market share to McKee Foods, which has rebuilt its distribution footprint following disruptions related to COVID, Morgan Stanley said. In addition, greater demand elasticity due to elevated price increases have hurt Hostess’ business, Morgan Stanley noted.

Potential suitors mentioned for the Hostess business include Mondelez International, Inc., Hershey Co., General Mills, Inc. and PepsiCo, Inc.

In its report, Morgan Stanley identified Hostess as a “good strategic fit” for Mondelez and Hershey but a “lesser strategic fit” for General Mills.

In the case of Hershey, Pa.-based Hershey Co., Morgan Stanley said the company has “executed on a steady acquisition strategy with 12 acquisitions in the last 10 years, but its acquisitions have been focused on expansion into BFY (better-for-you) (Lily’s) and salty snacks rather than indulgent snacks. With Hershey’s limited international presence (10% of sales), we see limited potential for revenue synergies from international expansion.”

Mondelez, meanwhile, has “clearly expressed interest in the US sweet snacks category,” Morgan Stanley said, pointing to the Chicago-based company’s 2020 acquisition of Give & Go and recent launch of Oreo Cakesters snack cakes as examples of such interest.

“A potential (Hostess) acquisition would accelerate Mondelez’s exposure to the category, and it would have the opportunity to expand the Hostess brand internationally,” the report said.

Although considered a “lesser strategic fit” for General Mills, Hostess does offer potential benefits to the Minneapolis-based company, Morgan Stanley said, including the potential to expand General Mills’ exposure to snacking, accelerate top-line growth and expand internationally.

“General Mills has a stated portfolio reshaping strategy and turned over ~20% of its business since FY18 through M&A in categories such as pet and divestitures of slower growing businesses (European yogurt),” the report said. “(Hostess) would be accretive to General Mills’ top-line growth and would also offer General Mills a strong distribution network in the c-store channel.”

Morgan Stanley did not divulge what kind of fit PepsiCo would be, only acknowledging that the Purchase, NY-based company “has greater balance sheet flexibility and could realize revenue synergies from expanding (Hostess) internationally, although it has placed a greater strategic emphasis on better-for-you categories.”