Skippy And Spam: Together At Last

By Will Ashworth | January 07, 2013 AAA

Skippy peanut butter is changing teams. Hormel (NYSE:HRL) announced Jan. 3 that it was buying the iconic brand from Unilever (NYSE:UL) for $700 million. Hormel expands its branded presence beyond Spam; Unilever gains some extra cash to expand its emerging markets business, which now accounts for more than 50% of its overall revenue. It's a win/win situation for everyone involved. I'll look at what it could mean for their stocks.

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For the Anglo-Dutch conglomerate, this is a deal of addition by subtraction. Skippy, although the number two brand in the U.S. with 18% market share, is a long way from the 34% controlled by J.M. Smucker (NYSE:SJM). More importantly, Skippy's worldwide revenues were just $300 million. Unilever has three brands with revenues of $2 billion or more, twelve brands with $1 billion in revenue, and 10 more knocking on the door. Even if it held 100% market share, Skippy still wouldn't be in its top three brands in terms of revenues. Building billion dollar global brands is Unilever's focus these days and even though food still represents 30% of its $47 billion in annual revenue, much of it comes from Knorr and Hellmann's. Skippy was a rounding error. Financially, it won't miss the revenue or the earnings. What it tells investors is that Unilever's focused on its brands and regions where growth is greatest. The rest must be cast aside. Hormel's gain is also Unilever's gain.

SEE: Analyzing An Acquisition Announcement

Who hasn't heard of SPAM? It's been on grocery store shelves for over 75 years. And so too has Skippy. In its conference call Jan. 3 to discuss the acquisition, CEO Jeff Ettinger pointed out that Skippy's household penetration rate is 75%, more than six times higher than SPAM. More importantly, Hormel is getting a known brand that will immediately add to both its grocery products and international segments in an accretive manner. Skippy's $270 million in U.S. business increases Hormel's fiscal 2012 revenue for its Grocery Products segment by 23% to approximately $1.44 billion. Internationally, Skippy's $100 million in revenue increases its All Other segment (includes all international revenue) by 28% to $463 million. Ironically, Unilever's corporate presentation talks about having unparalleled reach across the grocery store because of its diversity of products. With the acquisition of Skippy, Hormel gains an additional foothold in a different part of the grocery store. Up until now, Hormel's made tiny acquisitions that took as much work to close as this $700 million deal, which is its biggest ever. While it will do tuck-in deals where it makes sense, I expect it to make another big splash somewhere in the grocery store later in 2013 or into 2014. After all, including Skippy, it's now an $8.5 billion company in terms of revenue. With a conservative balance sheet, the next acquisition should be just as easy to digest as this one.

SEE: What Is A Tuck-In Acquisition?

Who Benefits Most?
While it's tempting to simply declare Hormel the winner because the addition of Skippy drastically changes the makeup of its business, investors shouldn't underestimate the value of streamlining a food conglomerate. Focus becomes more difficult the larger a business gets, and Unilever is clearly massive. It removes a distraction by selling Skippy and freeing money and manpower to continue growing in emerging markets, where it does more business than most of the world's largest consumer packaged goods companies. On the other hand, with Skippy providing entry into another part of the store along with higher margins, Hormel's profit profile becomes that much more attractive. In fiscal 2014, Hormel expects Skippy will add at least 13 cents per share to the bottom line. That's a 7% addition reducing its forward P/E to 14.8 multiple, which isn't half bad.

The Bottom Line
Hormel's stock gained just 8% in 2012, its worst performance since 2008. While Unilever unloads a distraction, I see Hormel getting a big boost from this deal in 2013. Expect double-digit growth for its stock in the coming year.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

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