ADM and the M&A Carousel

nicklipinski

This morning, ADM hopped on the M&A carousel and announced that it was acquiring WILD Flavors GmbH for approximately $3.0 billion.  WILD is a peer to companies such as International Flavors and Fragrances (IFF) and Givaudan, producing flavors and taste modifiers.

To the point, we aren’t a fan of the deal, for a number of reasons:

  • The multiple is hefty, 16.4x (€2.3 billion on speculated EBITDA of €140 million), with ADM currently trading at 8.3 EV/EBITDA (the multiple isn’t mentioned in ADM’s press release – never a good sign).  The multiple paid eclipses that of IFF (13.0x), for a business with a lower EBITDA margin.
  • Strategic bidders (Tate &Lyle, Givaudan and perhaps IFF) that represented much better fits in terms of complementary businesses balked at the multiple.
  • The company, aside from a majority stake owned by the family, was owned by private equity firm KKR – our experience suggests that there isn’t a great deal of value to be found when private equity is sitting on the other side of the table.
  • According to news reports, the sole remaining bidder other than ADM was Ajinomoto (Japanese additive company) – Japanese companies that use 0% as a cost of debt when making investment decisions don’t always make for the most rational bidders (Suntory and BEAM, perhaps?).
  • As we mentioned in our prior work on M&A, we see it as very difficult for an acquirer to add value given what we see as fairly aggressive multiples on publicly traded companies that no doubt trickle down through private transactions.  It is particularly difficult to see a path to value creation after multiple deals in a sector, and in April Symrise (a global competitor of IFF and Givaudan) acquired Diana Group (French ingredient manufacturer) in a deal valued at 13.7x EBITDA.  ADM paid a higher multiple for a business with a lower EBITDA margin structure.
  • ADM mentions “cost and revenue synergies of €100 million by year three”.  Revenue synergies, in our experience, are a lot like Big Foot – rumored to exist, seldom seen and then only by people you aren’t quite sure you trust.  Kidding aside, revenue synergies are difficult to quantify and capture, and we always caution investors against buying a stock based on a thesis that relies in any substantial part on revenue synergies.

Having said that, we do appreciate the symmetry of having the two primary players in the lysine price fixing conspiracy of the 1990s remaining as the last two bidders in an auction (Ajinomoto and ADM).

On the plus side, the acquired business is a stable revenue business; with long-term upside to margins (IFF’s EBITDA margins are closer to 22%); and is cash flow generative.

In some ways, we see similarities between this transaction and the TSN/HSH deal as ADM management pursues lower earnings volatility and more value-added products at the expense of continuing to grow the core business with more strategically relevant transactions.  Our preference for ADM would have been to be more aggressive in returning cash to shareholders via share repurchases (more accretive in the short-term than this transaction) while biding its time looking for a deal that is more in keeping with what we think is a powerful, long-term thematic tailwind for ADM – addressing the fundamental mismatch between where crops are grown and where they are consumed.  We loved the GrainCorp opportunity, for example, and while we recognize it was derailed by political considerations, politics and price can change (or one can help the other change).   We had some shorter duration concerns surrounding ADM (ethanol margins, as an example) and based on our view of this transaction, ADM continues to be on our least preferred list.

 

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