J.M. Smucker is acquiring Ainsworth Pet Nutrition and exploring the sale of its U.S. baking business. The division, which includes Pillsbury, Robin Hood flour and cereal, and Martha White baking mixes, has been valued at about $700 million. No potential buyers have been announced.
The company said the Ainsworth Pet Nutrition deal is valued at approximately $1.7 billion, after an estimated $200-million tax benefit, and would expand its presence in the fast-growing pet food segment. The all-cash deal is being financed with debt.
The acquisition brings with it the Rachael Ray Nutrish premium dry dog food brand, which Smucker said complements its existing Nature's Recipe line of dog foods and treats. Nutrish also makes premium cat food, which Smucker said would "help accelerate opportunities" within its current pet food offerings.
Food Dive Insight:
Smucker, founded in 1897, is trying to reposition itself by focusing on the lucrative specialty pet food market while unloading its slower-growing brands. Pet snacks and pet food, particularly the premium labels, are some of the most in-demand products in the market today. In addition to Nature's Recipe, the company owns Big Heart Pet Brands and its Milk-Bone dog treats and Meow Mix cat food, which it bought in 2015 for $5.8 billion.
Smucker said it expects the privately held Ainsworth Pet Nutrition to contribute $800 million in net sales and $25 million in annual cost synergies in the first full year after the acquisition closes, which is planned for sometime later this spring or early summer.
It's easy to see why Smucker is repositioning its business. Sales of its pet food brands increased 2.1% to $1.64 billion in the nine months ended Jan. 31, while sales of the company's U.S. retail food products dropped 4.6% to $1.54 billion. The company's iconic Pillsbury brand hasn't been doing well as people consume more healthier and fresher foods, and it's common for large CPG brands to reposition themselves as shopper tastes change.
In a research report, Barclays analysts said while it understood some of the "investor skepticism around this addition to the portfolio," Smucker has significant experience integrating businesses despite changes taking place in the pet food industry.
"This transaction is another example of a packaged food company looking to transform its portfolio (albeit at a high multiple excluding synergies) more towards categories with growth (akin to)" General Mills/Blue Buffalo and Campbell Soup/Snyder's-Lance, they said. "Notably, in this case, SJM (Smucker) already has a strong foothold in the pet category, with this acquisition increasing scale in the high growth 'mass premium' subcategory."
A sale of the baking segment could provide Smucker with cash to invest in its coffee, peanut butter and snack brands. The company has already bolstered its R&D spending in some areas, particularly its struggling Folgers brand. Smucker recently introduced a line of premium coffee called 1850 aimed at millennials and existing Folgers fans that emphasized Folger's connection to the California Gold Rush.
Richard Smucker, chairman of the food and pet company, told Food Dive in March 2017 the firm might seek to acquire smaller, trendier firms if their performance merited the investment.
"Having startups and smaller companies in the industry is healthy, even for the bigger guys, because if you are listening and watching what they're doing you can learn, too," he said. "We don’t create everything ourselves. In fact, sometimes if they do a really good job we might want to come and buy them."
Smucker is far from the only food company tapping the pet food space for growth. General Mills announced in February that it was buying Blue Buffalo Pet Products for $8 billion. Nestle has Purina PetCare and Mars recently bought veterinary and dog care firm VCA. Their hope is the promise of more revenue because, according to Euromonitor, retail pet food sales outpaced those in the packaged foods space last year with increases of 3.7% and 1.2%, respectively.
This pattern is likely to continue as the pet food and snacks segment is now a $30-billion industry, and shows no sign of slowing down. Ainsworth alone has seen a compound annual growth rate of 48.6%, with sales of about $700 million last year, according to Jared Koerten, a senior research analyst for Euromonitor.