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Post Holdings Shakes up the Market with a Spin-Off

09/25/2019 5:00 am EST

Focus: CONSUMER

Richard Howe

CEO, Stock Spin-off Investing

In November 2018, management at Post Holdings (POST) announced its intention to sell 20% of its equity in its growing Active Nutrition segment to the public, explains Rich Howe, editor of Stock Spin-Off Investing.

Net sales of the segment have been increasing at an annual rate of 30% since 2014. The “shake business” has been the key to the segment’s success. These ready to drink protein concoctions are enjoying increasing popularity.

New flavors and distribution gains are supporting the growth. The segment also produces protein bars and powders. Both products have been a negative offset to the shakes business.

The IPO is expected to take place in the December quarter. In April, Post submitted a “confidential” draft registration statement on Form S-1. “Confidential” means we can’t see it yet.  They say it’ll be public just before the road show.

The remaining business, still called Post Holdings, was formed in 2012 when it was spun out of Ralcorp — Ralcorp was later acquired by Conagra (CAG).

After the IPO of its Active Nutrition segment, Post’s  businesses will consist of the well-known cereal business in the US and UK (Honey Bunches of Oats, Grape Nuts, Weetabix in the UK and others), the Food Service segment (primarily eggs and potatoes, a big factor in the industry), and Refrigerated Retail (side dishes, eggs, cheese, and sausage, including Bob Evans Farms).

The company divested its moribund private label food business to a joint venture, 8th Avenue Food & Provisions (they retain 60% ownership).

Post Holdings has been a good performer since CEO Robert Vitale took over in 2014, up 15.3% annually. The packaged food group returned 1.7% over the same time period. Expanding leverage has funded very good revenue and operating profit growth, yet ROIC has been below their cost of capital. The IPO and the exit from the private label business should boost returns.

According to the press release that announced the spin-off, the IPO would create “a scalable, high growth asset with dedicated capital resources and the strategic flexibility to pursue both organic and M&A opportunities”.

In fact, the Active Nutrition segment has been the star segment within the company. The business has achieved rapid growth in recent years.  

We assume that management believes that by selling 20% of the stock to the public, the value of the 80% retained will increase Post’s market cap, thereby maximizing shareholder value.

The IPO seems timely because there is a great deal of interest among consumers in products that promote good health. Post management believes “the business’s growth characteristics and high cash flow conversion advantageously position it to be a consolidator across a wide range of opportunities”.

Products includes the protein shakes, bars and powders and nutritional supplement businesses of acquisitions made in 2013 and 2014. Their brand names now include Premier Protein, Dymatize, PowerBar, Supreme Protein and Joint Juice.

The products are primarily manufactured under co-manufacturing agreements at various third-party facilities located in the United States and Europe. The largest customers are Costco and Sam’s Club.
Those two accounted for approximately 59% of the net sales in fiscal 2018. In addition, the products are sold in other clubs, mass merchandise, grocery, drug, specialty and convenience stores as well as online.

They use a flexible sales model that combines a national and international direct sales force, broker network and distributors. Active Nutrition will be a profitable company as it is on track to generate 24% EBITDA margins in 2019.

There are many small private companies that specialize in shakes, protein bars, powders and nutritious protein foods and a small number of publicly traded companies that specialize in weight management and supplements. Visit Costco, Walmart or BJs, and you’ll see many shelves of different shakes, powders, and supplements.

At first glance, the following companies could be considered comparables: Herbalife Nutrition, Medifast, Natural Grocers by Vitamin Cottage, Nature’s Sunshine Products, Vitamin Shoppe, and Weight Watchers International. However, many of these companies are focused on weight loss or own retail stores, unlike Active Nutrition.

We will need to do additional work on Active Nutrition’s valuation, but a 15x EV/EBITDA multiple seems reasonable given the high growth and high margin profile of the business. Assuming a 15x EV/EBITDA multiple and 2019 EBITDA of $213M, a $3.2BN enterprise value seems reasonable. Post hasn’t disclosed how indebted Active Nutrition will be which prevents us from estimating its market cap.

Darcy Horn Davenport, current President of Active Nutrition, will serve as CEO of the new public company. She has been with Active Nutrition since 2009 serving in a variety of leadership roles in marketing and management, becoming President in 2017.

Rob Vitale, Post’s President and CEO, will also serve as Executive Chairman of the board of directors of the new public company. Other officers and directors of the new public company will be named at a later date.

Post Holdings has grown a lot over the last 8 years with revenue in fiscal 2018 at $6257 million vs. $996 million for fiscal 2010. Operating income grew from $210 million to $712 million over the same time frame. This was done mainly through acquisitions, with the share count more than doubling.

Leverage has expanded a great deal. In the most recent nine months, it’s a bit tough to cut through all the “non-recurring items”.

The most recent report reports a 8.4% decline in sales, a big operating gain on the back of the sale of the private label business, and “adjusted EPS” of $3.58 for the nine months ending June 30, 2019 vs. $2.99 for the same period last year.

Post’s cereal business is a distant third to Kellogg and General Mills. The egg and potato business have become more important. Post is in the process of acquiring Treehouse Foods, a ready to eat private label cereal company.

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