In a market where pet nutrition is rapidly picking pace, The J. M. Smucker Company SJM has struck the right chord with its latest move to acquire Ainsworth Pet Nutrition, LLC. Additionally, the company revealed intentions to explore prudent choices for its U.S. baking category, which includes the possibility of a divestiture. Let’s take a closer look at these announcements and see what it means for the company.

Ainsworth Acquisition

Per the terms of the deal, Smucker will acquire pet foods provider Ainsworth from L Catterton, a renowned private equity company, in a transaction worth approximately $1.9 billion. The amount includes estimated tax benefit of approximately $200 million. The company projects annual synergies of close to $55 million during the first three years. Also, post completion of the deal, the new business will add about $800 million in the first year. Subject to certain conditions, the transaction is expected to close during the fiscal year beginning on May 1, 2018.

Pet Food Gaining Traction

The pet food category has lately delivered growth, courtesy of consumers’ becoming increasingly conscious about the health and wellness of their pets. In fact, the pet food and snacks category generate sales of more than $30 billion annually and counts amongst the fastest growing segments in the nation’s food and beverages market. The company’s effort to tap into this fast-growing arena, with the Ainsworth buyout, is expected to bolster its pet business. Additionally, the buyout will add the well-known Rachael Ray Nutrish brand to Smucker’s pet food portfolio. Incidentally, the Rachael Ray brand accounts for close to two-thirds of Ainsworth’s sales. Apart from Smucker, General Mills Inc. GIS has been striving to expand in this category and entered into an agreement to acquire Blue Buffalo Pet Products, Inc. BUFF in February.

Well, this is not the first time that J.M. Smucker has undertaken strategic efforts to strengthen its footing in pet foods. In 2015, it acquired Big Heart Pet Brand that added iconic brands such as Meow Mix and Kibbles ‘n Bits. The buyout has been bolstering the company’s pet food business. Incidentally, net sales in the company’s U.S. Retail Pet Foods category inched up 2% during the third quarter of fiscal 2018, owing to improved volume/mix. These were primarily related to the Nature’s Recipe brand and the company’s pet snacks portfolio. With the inclusion of Ainsworth, we expect Smucker to expand further in this category.

Review of Baking Business

J.M. Smucker is also reviewing strategic options for its U.S. baking business, including a possible divestiture. The review process is expected to be completed by the end of the first quarter of fiscal 2019. The company’s baking business encompasses renowned brands such as Pillsbury and Hungry Jack amongst others. The business, which falls under the U.S. Retail Consumer Foods segment, is expected to generate sales of approximately $370 million for the fiscal year ended in April, 2018. The review process forms part of the company’s restructuring efforts to focus more upon its pet products, coffee, snacks and other food items.

 

 

Wrapping it Up

Well, the food industry has been grappling with stiff competition and shifting consumer preferences. Despite these headwinds, industry players like J.M. Smucker and United Natural Foods UNFI are resorting to strategic tie-ups and other growth initiatives to thrive and sustain. J.M. Smucker actively pursues strategic acquisitions both in the United States as well as overseas. Further, the growing popularity of certain brands has encouraged the company to undertake innovations. Moreover, cost-saving initiatives have enabled the company in undertaking investments.

Indeed, such dedicated endeavors are likely to keep this Zacks Rank #2 (Buy) company as investors’ favorite. Markedly, the stock has advanced 18.7% in the past six months, versus the industry’s decline of 5.6%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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