What does Post see in MOM Brands?

by Keith Nunes
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Post sees big growth in bagged cereal.

ST. LOUIS — For the past 18 months Post Holdings had been working to gain share in the value segment of the ready-to-eat cereal category. The effort, which involved Post introducing bagged cereal varieties, had put it in direct competition with MOM Brands. On Jan. 26, Post announced its intention to acquire MOM Brands for approximately $1.15 billion in a move designed to cement its position as a leader in the market for value R.-T.-E. cereals.

“Within the value segment, the growth has been driven by bagged cereal, which has grown at a compound annual growth rate of 5.6% over the last four years,” said Rob Vitale, president and chief executive officer of Post Holdings, in a conference call with financial analysts on Jan. 26. “Some of you have asked us if we are moving away from R.-T.-E. cereal; hopefully, this transaction answers that question. We are committed to R.-T.-E., and we are committed to growing R.-T.-E. in the sub-segments in which we identify opportunity.”

With sales of approximately $760 million in 2014, MOM’s business was dominated by its branded and private label cereal operations. Its portfolio of products is distributed across multiple channels, including traditional grocery, mass merchandising and food service. The company also markets a line of bagged natural, organic and hot cereals.

The two businesses combined will feature an 18% dollar market share in the cereal category and a 21% volume share. The combined business would feature 16 of the top 50 R.-T.-E. cereal brands, according to the company.

Mr. Vitale called the proposed acquisition “the most strategic transaction we can execute.”

“It improves our scale and overall relevance to the category,” he said. “It broadens our product offering and solidifies our presence in the key value segment. It offers significant synergy opportunities, which we have a high confidence in our ability to deliver.”

Post has been aggressive in its acquisition activity, including last year's $2.45 billion deal for Michael Foods.

Among the questions offered by analysts participating in the conference call, a common theme emerged – Why cereal? Post has been aggressive in its merger and acquisition activity, but it has also been diversifying its portfolio away from cereal by adding such companies as American Blanching (peanut and nut butters); Michael Foods (eggs, potatoes and dairy products); PowerBar and Musashi (nutrition bars); and Dakota Growers (pasta).

“We seek to create growth in the totality of our portfolio,” Mr. Vitale said. “We invested in areas like private label peanut butter, like eggs, like refrigerated potatoes, like all of the protein businesses. Those are categories that have attractive growth rates, and in many cases, we have leadership positions in each of those categories. That left cereal as a category exposure within Post to be addressed.

“This addresses cereal by giving us the opportunity to have a long runway of growth by cost management and by building out that defensible niche within the value segment of the overall category.”

The company said once the acquisition is approved, it expects to realize $50 million in synergies by the third full fiscal year following closing of the transaction. Noting there is overcapacity in cereal manufacturing, Mr. Vitale said Post will look at capacity rationalization from manufacturing and distribution as it integrates the MOM Brands business.

During the call, Jeff Zadoks, chief financial officer, confirmed Post Holding’s fiscal year 2015 adjusted EBITDA guidance of between $540 million and $580 million, excluding any contribution from MOM Brands.

“We expect progressive improvement in quarterly adjusted EBITDA throughout FY15,” he said. “The expected sequential improvement is primarily driven by a recovery at Dymatize, seasonality and cost management and initiatives at Post Foods, and the timing of commodity cost decreases impacting operating results.”

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