- Act II Global Acquisition to Purchase Two Companies Creating Whole Earth Brands
- Newly Revised Terms Reflect Just 6.75x 2020 Ebitda vs. 7.9x on Previous Terms
- New Redemption Deadline is Monday, June 22 and Vote is Wednesday, June 24
- New Anticipated Net Leverage is 0.8x vs 1.4x on Previous Terms
- Company’s Product Sales Already Recovering from Very Short Coronavirus Setback
- Chairman Irwin Simon Founded Hain, Has Completed Over 55 M&A Deals in His Career
- Footprint of 100 Countries Creates Unique Opportunity to Take More Brands Global
The shift away from processed sugar to healthier choices has only just begun. Imagine an opportunity to invest in a proven wellness industry leader at a discounted price – with a loaded pipeline of M&A targets to boot.
Meet Whole Earth Brands, which was created after Act II Global Acquisition Corp., a special purpose acquisition company (SPAC), purchased two companies that own a range of consumer sweetener brands including Equal along with a thriving flavorings business. (UPDATE: The company now trades under tickers: FREE and FREEW).
The deal terms were recut for the second time on Tuesday morning – with a lower price, less expected leverage, and less cash needed in trust for the deal to close. The new deadline for Act II investors to redeem shares for cash is Monday, June 22 and the vote to approve the merger is Wednesday, June 24.
Investors have several reasons to give the deal a close look now – before it becomes official and the shares likely rise. First, Whole Earth Brands should continue to benefit from the shift away from sugar to plant-based sweeteners in developed countries. Starbucks Corporation, for instance, offers Whole Earth Sweetener, a mix of stevia and monkfruit. In developing countries, meanwhile, the transition from sugar is in a nascent phase, and consumers are likely to choose well-known alternatives such as Equal and Canderel.
Importantly, such brands should thrive as consumers purchase more food online. The company’s June 16 presentation cites a survey showing that the coronavirus has led 54% of consumers to consider permanently buying more food on the internet. Items such as sweeteners that are used regularly could easily wind up in repeat order baskets that customers purchase every few weeks. And to the extent consumers want to cook at home more frequently, many Whole Earth Brands products will benefit from baking and other culinary needs.
Whole Earth Brands also has a century-old licorice flavorings and ingredients business. The company supplies to some of the largest consumer companies in the world such as The Hershey Company, Mondelez International, Inc., and Altria Group, Inc.
Perhaps more exciting is the potential to execute highly-accretive M&A transactions under the guidance of Irwin Simon, who founded Hain and has completed over 55 deals. Between 1995 and 2017, Hain grew revenue at a compounded annual rate of 19%, reflecting successful acquisitions such as Earth’s Best, Garden of Eatin’, and Tilda, a leading rice producer.
Indeed, Whole Earth Brands already has identified several deals that are likely possible in the months after the deal closes. Those targets include both branded food companies as well as flavorings businesses with locations all over the world.
And once a company is acquired, Whole Earth Brands has a unique global distribution footprint where new products can be introduced. Whole Earth Brands has a presence in over 100 countries, with almost all of the developed world and many developing nations.
Importantly, the company will come out of the deal with leverage of just 0.8 times Ebitda under the newly-revised terms, versus 1.4 times previously. Given Whole Earth Brands’s robust cash flow, it could probably ratchet leverage up to as high as 3 times. By comparison, Hain was often constrained by much higher leverage but still completed many successful deals.
Investors should not overlook the rest of the talent that will be at the helm. CEO Albert Manzone has a long history at major consumer products companies including PepsiCo, Inc. and Wm. Wrigley.
That expertise should help Whole Earth Brands position itself as a potential target in its own right. Large consumer products companies are continually on the hunt for innovative operators in growth sectors that they would prefer to buy rather than cultivate in house.
Perhaps best of all, investors who buy ACTT shares now can get them at a great price. In early May, when the stock market was considerably lower than today, the deal terms were prudently revised lower to reflect the short-term impact of the coronavirus. Those terms indicated an enterprise value, adjusted for net debt, of 7.9 times 2020 Ebitda versus 8.5 times initially. But after Tuesday’s revision, ACTT investors can get the company for just 6.75 times 2020 Ebitda.
There are very strong signs that the worst of the coronavirus slump is well behind Whole Earth Brands. During May, sugar substitute sales rose 23%, with natural substitutes up even more – 29%, according to data from Nielsen. The Whole Earth name brand grew a whopping 69% during that period, twice the rate of natural sugar substitutes.
How does Whole Earth Brands stand up to comparable companies? Within the consumer products category, McCormick & Company, Incorporated trades at 24.1 times 2020 Ebitda while Simply Good Foods Co trades at 14.6 times, according to Sentieo, an AI-enabled research platform. In the flavorings segment, International Flavors and Flavorings, Inc. trades at 16.7 times.
The bargain on Whole Earth Brands may not last long. Other SPAC deals have surged after becoming official, including Open Lending, LLC (ticker: LPRO), which has leapt 40% to about $14.00 in the last couple of weeks.
With structural tailwinds and a proven dealmaker ready to pounce on acquisitions, Whole Earth Brands investors should expect to see some sweet returns.
John Jannarone, Editor-in-Chief