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3M Inks a New Deal to Unlock Value

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3M Co. (NYSE:MMM) announced on Dec. 14 it reached a definitive agreement to combine its food safety business with Neogen Corp. (NASDAQ:NEOG) to expand the product portfolio and create long-term growth opportunities in the food safety sector.

3M is an American multinational company with business roots in industry, worker safety, U.S. health care and consumer goods segments. The company holds patents to more than a thousand innovative products, including Post-It notes and N95 respirators, smartphone touch screens and industrial adhesives. It has grown to become a global leader in many industries, such as health care, highway safety and office stationery.


Neogen is a global food safety company that makes and distributes solutions for food and animal safety. The food segment provides test kits to detect foodborne bacteria, natural toxins, food allergens, drug residues, plant diseases and sanitation concerns. The animal safety segment distributes a wide range of animal health care products, including diagnostics, pharmaceuticals, veterinary instruments, wound care and disinfectants, as well as rodent and insect control solutions.

Specifics of the deal

In a deal valued at $9.3 billion, 3M is separating its food safety business and combining it with Neogen to create a global food safety and security provider. Existing Neogen shareholders will own 49.9% of the combined company, while 3M shareholders will own 50.1%. The new company will have an expanded product offering in food safety and target a wider market. The deal is expected to close by the end of the third quarter of this year, pending approval from Neogen shareholders and relevant government authorities. After the close of the deal, customers of 3M's food safety business will have access to Neogen's genomics services, which include DNA testing, a new addition to the company's existing capabilities. Neogen, on the other hand, will be able to extend its microbiological product lines, which will complement its animal safety business and provide clients with more options for protecting their food supply. 3M expects to receive around $1 billion and intends to use the proceeds to pay dividends and reduce debt.

Since 2020, 3M has been looking into the possibility of selling its food safety unit. This transaction exemplifies the companys active approach to portfolio management. The food safety division of 3M generated around $342 million in revenue in 2020 and over $280 million in 2021. The new company will have increased revenue growth opportunities with a rapidly expanding market of emerging technologies. Neogen is already a pure-play food security company and has strong growth prospects with its focus on sustainability, food safety and supply chain solutions. With the expanded geographic footprint, product offerings, innovation and financial capabilities, the combined company is poised to become a global food safety innovator, capitalizing on attractive long-term growth opportunities. According to the statement released by 3M, the combined company is expected to have adjusted earnings before interest, taxes, depreciation and amortization of around $300 million in the first full year after the completion of the transaction.

Innovation is on the cards

To provide effective food safety solutions, Neogen employs blockchain technology and other innovative technical platform solutions. Neogen partnered with Ripe Technology in 2020 to begin incorporating blockchain into its food safety tests and animal genomics. Blockchain is a digital technology that records data permanently and irreversibly. The company aims to utilize this technology in the food and livestock industries to create the history of products and animals as they travel through their entire production cycles.

Neogen said it benefits from blockchain technology because it permanently connects a massive amount of important data. In a recent interview, CEO John Adent explained the use of this technology, noting that if someone buys one of Neogen's customers' steaks and sends a sample to the company, it can provide all the necessary details to the consumer, including where the animal lived, what it ate, all the inputs into the animal and every stop before it was consumed. By combining its food safety business with Neogen, 3M is likely to unlock many growth opportunities to improve this innovative technology while benefitting from an improvement in market sentiment toward its stock.

According to Markets and Markets, the food safety market is facing many challenges because of technological inefficiency. The market's lack of effective and efficient technological solutions demonstrates the urgent need to capitalize on and invest in emerging technologies. Neogen has already taken a step forward in ensuring efficiency and food safety protocols by adopting a data-driven analytical platform and blockchain technology. Combining with 3M's food safety unit will allow the company to reach more customers with an unrivaled product offering. The food safety market is projected to grow at a compounded annual rate of 7.9% to reach a value of $28.6 billion by 2026.

Takeaway

3M, which has long been a favorite of dividend investors, is continuing to look for new opportunities to expand its business. The company's move to separate the food safety business and combine it with Neogen can be expected to unlock value for long-term shareholders in the coming years. Trading at a forward price-earnings ratio of 17.59, 3M is reasonably valued in the market, especially for investors looking at the attractive dividend yield of 3.4%.

This article first appeared on GuruFocus.