NEW YORK — Snyder’s-Lance, Inc. may be an attractive acquisition candidate for larger companies, but is more likely to be a buyer than a seller for the foreseeable future, said Mario Contreras, a research associate with Deutsche Bank, New York.
Mr. Contreras offered his views on business prospects, including merger and acquisition possibilities, in an Oct. 6 report on the Charlotte, N.C.-based snack maker. With the report, Mr. Contreras assumed coverage of Snyder’s-Lance from Eric Katzman but reiterated Deutsche Bank’s “hold” opinion of the company.
Because Snyder’s-Lance has been growing more quickly than many other consumer packaged foods companies, it could be an attractive takeover candidate, especially for companies with larger, complementary direct-store delivery networks, Mr. Contreras said. These include Kellogg Co.; Mondelez International, Inc., and PepsiCo, Inc.
Still, Mondelez is more focused on international opportunities while PepsiCo could face antitrust issues if it were to make a move for Snyder’s-Lance, Mr. Contreras said.
“Kellogg has a sizable presence in D.S.D. snacks via Keebler cookies and crackers, though we note Pringles and other wholesome snacks (Nutri-Grain, Rice Krispies treats) are distributed via warehouse,” he said. “However, Kellogg is facing well-documented challenges across its U.S. business. We question how high a priority Snyder’s-Lance could be for Kellogg, given the latter’s increased focused on international markets of late (Africa in particular). In addition, with Kellogg’s management focused on Project K and stabilizing the existing core cereal and snacks business, the timing may not be right for adding the complexity of a large integration. Thus, while we remain unconvinced that Kellogg would be interested in a near-term acquisition of Snyder’s-Lance, some investors might view Kellogg as a potential buyer in an acquisition.”
If Snyder’s-Lance chooses to pursue acquisitions, the company does not face significant obstacles, at least from a balance sheet perspective. Mr. Contreras said the company‘s current credit agreements cap its permissible debt-to-earnings ratio at 3.5 times EBITDA (the limit bumps up to 3.75 for a year after an acquisition).
“With current leverage around 2 times, this suggests the company has room within its covenants to complete a debt-based deal of up to $500 million,” Mr. Contreras said, adding he thinks smaller bolt-on acquisitions are more likely.
The Deutsche Bank analysis identified Late July, an organic snack maker acquired by Snyder’s-Lance, both as a potential driver for growth as well as a likely drag on earnings in the near future. Mr. Contreras said the hold opinion reflected a lack of visibility around margin expansion, a belief opportunities for further distribution gains are waning and the company’s current valuation (with a price-to-earnings ratio of 25 times 2016 earnings).
“Among its core brands, Late July has the most A.C.V. (all commodity volume — a distribution measure) opportunity, highlighting long-term potential to expand the brand through its national D.S.D. network,” Mr. Contreras said. “The acquisition was completed in late 2014, and we expect meaningful increases in 2016 and beyond. We can point to the company’s success with Snack Factory Pretzel Crisps, which increased A.C.V. from 50% to 60% prior to the acquisition to its current 75%. While the ceiling for Late July is likely smaller, given a more focused appeal (organic, non-G.M.O.), we expect the brand will see meaningful growth under Snyder’s-Lance management.
Addressing prospects for reaching management’s 2016 targets of double-digit operating margins, Mr. Contreras identified certain opportunities for improvement, including the elimination of residual costs from the private brands business divested in 2014. Margins also may be boosted as core brands become a larger part of the company’s overall portfolio.
“On the other hand, the recent acquisition of the Late July brand is barely profitable and could be dilutive to margins as the company invests for further growth,” he said. “In addition, while management has indicated it is approaching stable advertising levels, we believe the company will need to continue to invest in order to support top-line growth.”
Deutsche Bank is predicting an 8.7% operating margin for 2016.
Top-line growth prospects are enhanced by the company’s shift toward better-for-you products, accounting for about a third of sales, Mr. Contreras said.
“This includes products and brands such as the recent Late July acquisition (organic), gluten-free Pretzel Crisps and Lance sandwich crackers, and Lance QuickStarts breakfast biscuit sandwiches,” he said. “However, our sense is that the company may be reaching a ceiling in terms of geographical distribution potential. Snyder’s of Hanover is already well distributed on a national basis and we believe Pretzel Crisps is reaching a similar level of distribution.”
Looking specifically at the Lance brand, Mr. Contreras said a brand renovation and the introduction of breakfast-focused QuickStarts “appear to be having a positive effect.”
The Lance brand enjoys strong distribution in the South, its home region, but has more modest distribution in other regions. The West is a particular weak spot, Mr. Contreras said.
Executives made the case Snyder’s-Lance has gained new strengths, he said.“Management also emphasized meaningful improvement in the company’s innovation capabilities over the last few years, particularly since the acquisition of Baptista’s (June 2014),” he said. “To the extent the company can develop new products more efficiently and with a greater success rate, this could contribute to margin expansion. However, we are somewhat cautious that new products, particularly in the better-for-you category, will consistently be margin-neutral (or better). We suspect that many of the new product offerings in the better-for-you space will have higher ingredient costs. We also note increased competition in the better-for-you space.”