On Thursday, food producer Hormel (click ticker for report: ) announced it will acquire Unilever’s (click ticker for report: ) Skippy Peanut Butter for $700 million. Skippy is a legendary brand, trailing only Smucker’s (click ticker for report: ) Jif in the US peanut butter market.
The deal should add approximately $370 million in annual sales, while being mildly accretive to earnings in fiscal year 2013 and adding $0.13-$0.17 per share in fiscal year 2014. More importantly, Skippy is the market-share leader in China, and the company hopes to expand its international presence via Skippy and its popular Spam brand.
Image Source: The Peanut Institute
We like the deal for Hormel, especially since the peanut butter market has experienced fantastic growth during the past few years (see above chart). With incomes relatively stagnant in the US and unemployment remaining fairly high, we’ve seen explosive growth in peanut-butter consumption, and we think the trend is sustainable. Peanut butter is a cheap, dense food that offers a compelling value for consumers. Although we do not expect consumption to explode in China as it has in the US, we think that market is also ripe for long-term growth.
Unilever is also a winner, as the deal will give the company the opportunity to further focus on its beauty products segment. In fact, we wouldn’t be surprised to see the company shed more food brands in the future. The firm is not in need of any capital, so sales could come at more desirable prices.
Overall, we continue to believe both Hormel and Unilever are fairly valued, though we see potential upside to our fair value for Hormel if integration goes as planned. Neither firm is under consideration for the portfolio of our Best Ideas Newsletter at this time.