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Simply Good Foods Company To Acquire Quest Nutrition


Quick Take

The Simply Good Foods Company (SMPL) announced it has agreed to acquire Quest Nutrition for $1 billion.

Quest Nutrition is a healthy lifestyle snacks brand.

With the deal, SMPL is gaining a fast-growing group of brands focused on younger demographics and within the fast-growing nutritional snack industry.

Target Company

El Segundo, California-based Quest Nutrition was founded in 2010 as a healthy lifestyle food brand whose strategy is to manufacture its snacks with high protein levels, minimal sugars and carbohydrates.

Management is headed by President and CEO Dave Ritterbush, who has been with the firm since 2017 and was previously CEO at popchips.

Below is an overview video of the company’s latest marketing campaign:

Source: Quest

Quest’s primary offerings include protein bars, cookies and chips, thin-crust pizza, and protein powders.

Market & Competition

According to a market research report by Hexa Research, the US healthy snacks market was valued at $3.58 billion in 2017 and is projected to reach $5.3 billion by 2025, as illustrated by the graphic below:



Source: Hexa Research

This represents a forecasted CAGR of about 5% between 2018 and 2025.

The main driver for this expected growth is the growing demand due to an increasingly busier lifestyle, the benefits of adequate nutrition and the fact that they meet some important requirements for some people, such as lower carbohydrates and salt-free products.

Major vendors that produce healthy snacks include:

  • General Mills (GIS)

  • Mondelez (MDLZ)

  • PepsiCo (PEP)

  • Hormel Foods (HRL)

  • KIND Snacks

  • Tyson Foods (TSN)

  • Select Harvests (ASX:SHV)

  • Nestlé (OTCPK:NSRGY)

  • B&G Foods (BGS)

  • Hain Celestial Group (HAIN)

Source: Sentieo

Acquisition Terms and Financial

SMPL disclosed the acquisition price and terms as $1 billion in cash, or $870 million net of tax benefits.

A review of the firm’s most recent published financial figures indicate that as of May 25, 2019, SMPL had cash and equivalents of $247.6 million and total liabilities of $294.6 million, of which long-term debt was $191 million.

Free cash flow for the 39 weeks ended May 25, 2019, was $51.9 million.

In the past 12 months, SMPL’s stock price has risen 62.8% vs. the U.S Food industry’s gain of 0.2% and the broader overall U.S. market’s drop of 2.7%, as the chart below indicates:



Source: Seeking Alpha

Earnings surprises have been positive compared to analyst consensus estimates in all eight of the last eight quarters, as the chart shows below:



Source: Seeking Alpha

Analyst sentiment in recent earnings calls has been improving since early 2019, as shown here:



Source: Sentieo

Commentary

SMPL is acquiring Quest Nutrition to broaden its nutritional offerings.

As SMPL CEO Joseph Scalzo stated in the M&A conference call,

Quest is a strong consumer brand with a broad product offering. Its growing consumer base is young, affluent, urban and leads an active lifestyle. So while the nutrient profile is very similar to Atkins, its consumer target is highly complementary to Atkin’s older, more suburban core user. Quest has built its brand with delicious snacking products and using an impressive social and digital ecosystem. The good news is that from our diligence, we believe the brand is at the right phase of its development to benefit from our company’s expertise in growing brand awareness and trial using more broad-reaching media vehicles. And similar to Atkins, Quest household penetration is low, so the runway for growth is significant. Additionally, we believe our relationships in traditional food, mass and drug retailers can help grow product distribution. Likewise, we believe Quest’s expertise in e-commerce, small format retail, social digital and different snacking forms can improve our Atkins products, marketing and overall business.

So, the deal presents SMPL with numerous potential benefits and it is clear that management sees a similar growth playbook to its Atkins line of products.

Investors appear to like the deal, as they have pushed SMPL up 6% since the deal was announced.

With the acquisition, SMPL will also stand to benefit from Quest’s ‘best-in-class digital and social marketing’ capabilities, which management should be able to apply to its other brand activities.

I’m bullish on the transaction, which provides SMPL with access to a younger demographic as well as numerous synergies, including a shared supply chain and distribution model, and favorable market dynamics in the nutritional snacking industry.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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