Thanks to a strong balance sheet, natural sweetener and flavorings company Whole Earth Brands, Inc. is poised to make multiple accretive acquisitions and it is aggressively building a pipeline of targets. That’s according to Executive Chairman Irwin Simon and CEO Albert Manzone, who spoke to IPO Edge in an exclusive interview this week. Messrs. Simon and Manzone also pointed out that if they don’t do a deal by the end of 2020, their leverage would be a mere 1.2x with $100 million of liquidity, including cash and revolver capacity. They added that unlike the business’s previous owner, corporate raider Ronald Perelman who took significant cash out of the company, they plan to invest in organic growth via brand building, innovation, and distribution expansion.
As IPO Edge explained in a recent analysis, the company, whose shares trade at approximately 5.7 times 2021 Ebitda, is valued far below comparable companies such as McCormick & Company, Incorporated while Simply Good Foods Co. The full interview is below:
IPO Edge: Can you tell us more about the potential M&A targets you’re considering?
Messrs. Simon and Manzone: We continue to seek out companies that are strategically aligned with Whole Earth Brands focus on healthy, natural and plant-based products. We are looking at consolidation opportunities, companies within attractive adjacent categories and other on-trend CPG opportunities that provide growth opportunities and the ability to leverage into increased shareholder value.
IPO Edge: How soon could a deal happen?
Messrs. Simon and Manzone: Our businesses have strong platform characteristics, with the right people, systems and infrastructure in place to integrate businesses we acquire. Since acquisitive growth is one of our core strategic imperatives, we are aggressively building our pipeline and reviewing companies to put our strong balance sheet to work for our shareholders in the near-term.
IPO Edge: What are the criteria for M&A targets in terms of their near-term financial impact?
Messrs. Simon and Manzone: From a financial perspective, we are screening for companies that are accretive to our top-line growth rates and/or earnings, resulting in continued improvement of our financial outlook and return on investment.
IPO Edge: If you didn’t make any acquisitions, where would your net leverage be at the end of the year?
Messrs. Simon and Manzone: In the event that we do not make any acquisitions, our Pro Forma Net Leverage at the end of the year would be approximately 1.2x, with the company having approximately $100 million of liquidity, including cash and revolver capacity to support organic and acquisitive growth.
IPO Edge: What’s the difference between how you plan to manage Whole Earth Brands versus the company under Ronald Perelman?
Messrs. Simon and Manzone: We do see two major differences with a cash-first approach under Ronald Perelman. We intent to reinvest our free cash flow to accelerate growth and generate industry leading growth rates. This includes brand building, innovation, and distribution expansion.
With our strong management team, stable cash flow and low leverage, we can now pursue exciting and value-accretive M&A opportunities. We believe there will be a number of opportunities in the current environment as retailers refocus on rationalizing vendors and working more with trusted partners who deliver excellent service levels like Whole Earth Brands.
IPO Edge: How have sales trends looked in the last several weeks as many people return to normal spending habits?
Messrs. Simon and Manzone: During the COVID-19 pandemic, the assets have performed extremely well in the “stay-at-home” economy. In the past few weeks, we have seen several key trends continue which will benefit Whole Earth Brands.
Consumer tastes are shifting even faster to health and wellness, which is where our products can be successful. If need be, COVID-19 pointed to obesity and diabetes dangers as pre-conditions. We expect consumers’ global shift away from sugar and sugar-added products to accelerate and action from governments to intensify (e.g., sugar tax, labeling) in favor of sugar-free and calorie-free plant based solutions.
Changes in consumer behavior are driving consumption of coffee and tea at home. Made-from-scratch cooking, due to households’ lower disposable income, is driving an increase in baking. Whole Earth Brands is there to serve consumers with plant-based, zero-calorie and sugar-FREE baking solutions, including Whole Earth Allulose Baking Blend, Whole Earth Brown Allulose Baking Blend, Whole Earth Monk Fruit Blend and Whole Earth Erythritol.
We are seeing strong momentum and are gaining market share with growth in retail and e-commerce. Whole Earth Brands is capturing higher margin retail and e-commerce sales as well as market share as a result of its investments in the e-commerce channel over the past few years and partnership with Amazon in both North America and Western Europe.
IPO Edge: Is there anything about the business that investors may be missing?
Messrs. Simon and Manzone: Despite our size, Whole Earth Brands is a truly global company serving over 100 countries. One key strength of the platform is our ability to scale revenues without significant capital outlay or large increases in SG&A. Our facilities and co-manufacturing sites have sufficient capacity to grow volume. We have 6 manufacturing sites which require very modest capex (5 on the Flavors & Ingredients side for licorice processing, and 1 facility on the Branded CPG side serving European and global customers).
The existing global infrastructure that is in place, both systems and human capital, can sustain the existing business as well as new acquisitions. Our geographic footprint also means we are highly diversified and not overly reliant on any one area or customer. Our branded CPG business is approximately 1/3rd US, 1/3rd Western Europe, and 1/3rd other jurisdictions. Our Flavors & Ingredients business is approximately 40% US, with the remainder split between Europe and Asia. On the Branded CPG side, India and China remain significantly underpenetrated markets for us and we believe could represent large opportunities which are not in the current forecast.
John Jannarone, Editor-in-Chief