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As Grocery Stores Cut Cereal Shelf Space, Refrigerated And Frozen Foods Are Wanted Products

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As Grocery Stores Cut Cereal Shelf Space, Refrigerated And Frozen Foods Are Wanted Products
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When analysts at Piper Jaffray downgraded Kellogg Company (NYSE: K), they highlighted an ongoing trend that could hurt food makers: Grocery stores are redesigning stores to decrease shelf space. Move aside, dry cereals; hello there, refrigerator-cased breakfast options!

Needless to say, food companies heavily reliant on breakfast cereals are concerned, but there are options on the table.

Likely recognizing this headwind, Post Holdings Inc (NYSE: POST), a notable cereal and breakfast-foods company, agreed to acquire Bob Evans Farms Inc (NASDAQ: BOBE), a maker of refrigerated and frozen breakfast items and side dishes. But the acquisition came at a hefty price, according to Gadfly's Tara Lachapelle.

Post will be paying around 15 times Bob Evans' projected annual adjusted EBITDA of $107 million or close to 16 times trailing 12-month EBITDA, Lachapelle noted. By comparison, prior deals in the food space occurred on average at a 14 times EBITDA multiple over the past five years and a multiple of 10 over a longer period.

If anything, this demonstrates how important it is for cereal and breakfast companies to expand outside grocery stores' middle aisles to fuel growth, she noted. "Post, the maker of Honey Bunches of Oats and other cereals, is paying a rich price to add more popular refrigerated breakfast foods and side dishes to its supermarket offerings," she said. Cereal and canned soups are among the worst performing food categories, with a meager growth prospect moving forward. But Bob Evans' products are sold in prime real estate in grocery stores, so investors appear to be happy with the deal.

At the end of the day, Post presented to investors an acquisitive growth strategy at a time when other food companies are sitting back and doing nothing to address the problem.

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Latest Ratings for BOBE

DateFirmActionFromTo
Sep 2017William BlairDowngradesOutperformMarket Perform
Jul 2017BerenbergInitiates Coverage OnBuy
May 2017William BlairInitiates Coverage OnOutperform

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