TreeHouse to Acquire Healthy Snack Business Flagstone for $860M - Analyst Blog

Food manufacturer TreeHouse Foods, Inc. THS has agreed to acquire Flagstone Foods -- a Minneapolis-based maker of dried fruits and nuts -- from Gryphon Investors and other shareholders for $860 million cash. Last week, TreeHouse had reportedly triumphed over a Chinese group at the auction for Flagstone, after expressing its interest to buy the same in May.

Flagstone Foods is one of the largest manufacturers and distributors of private label healthy snacks in North America, and holds leadership position in the trail mix and dried fruit categories, one of the fastest growing categories in the food industry. The deal will be a strategic fit for TreeHouse as it will position the company as a private label leader in the high growth healthy snacks sector.

TreeHouse expects the deal to add approximately 5 to 8 cents to 2014 earnings and approximately 24 to 28 cents in earnings after a full year of closure of the deal. It will also increase TreeHouse's annual revenue by approximately $750 million. The deal is expected to close during the third quarter of 2014 and TreeHouse is expected to finance the deal using a combination of borrowings under its existing credit facility and a $325 million equity issuance.

Following the acquisition, TreeHouse's annual sales are expected to reach $3.5 billion and adjusted EBITDA should exceed $450 million.

This IL-based food manufacturer is on an acquisition spree and has expanded into new categories and markets. In fact, TreeHouse has acquired around six food companies in the past four years.

The most recent acquisition was of Protenergy Natural Foods for approximately $150 million (CAD $170 million), which was completed on May 30. Protenergy Natural Foods is an industry leading developer and manufacturer of premium quality food and beverage products. The acquisition added items such as soups, broths, and gravies to TreeHouse's portfolio.

These acquisitions have played an important role in pulling up the revenues of the company, as reflected in the recently reported first quarter 2014 results. Adjusted earnings increased 8.1% from the prior year quarter and revenues grew 14.6%, driven by acquisitions of Cains Foods and Associated Brands, made last year. The company's top-line growth was also driven by single-serve coffee and productivity gains. Likewise, we expect the Flagstone acquisition to improve TreeHouse's performance going forward.

However, the company needs to be careful with its acquisitions as both Cains Foods and Associated Brands have lower margins, which is likely to create margin pressure.

TreeHouse carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

Investors interested in the food industry can also consider stocks like Mondelez International, Inc. MDLZ, The Hain Celestial Group, Inc. HAIN and Inventure Foods, Inc. SNAK, all of them holding a Zacks Rank #2.