Company: Whole Earth Brands (FREE)
Sector: Consumer Staples – Packaged Foods
Price/Market Cap: $13.40/$500M
Target Price/Implied Upside: $25.00/85%
Thesis
Undervalued, consumer packaged goods company engaged in consolidating the “Better for you” sweetener market. Led by industry veterans, Whole Earth’s strategy is supported by strong brands, global tailwinds, and a long-established customer base. The business leverages an asset lite model ideal for scaling newly acquired brands.
Whole Earth has a tremendous opportunity to consolidate a fragmented and often overlooked area of the grocery store. The company seeks to be the leader in the Health and Wellness “Free-from” space through a portfolio of plant-based sweeteners and flavor enhancers. The “Better for you” sweeteners segment is positioned to benefit from the global shift towards healthier eating with natural ingredients and clean label packaging. Irwin Simon, who founded natural food company Hain Celestial and grew it to over $2.5B in revenue, co-leads the company. The opportunity to invest at an attractive valuation exists because the company currently has limited research coverage and the mid-2020 SPAC merger combined with multiple M&A transactions have made the financials difficult to follow. The stock is currently trading 30% above its IPO price and well above its Post-IPO low, however, we believe significant upside remains as the market still values the company as if revenue was in decline and not recovery. If valued in line with peers, the company is worth $25/share. If the company reaches $1B in revenue through management’s organic and M&A growth strategy, the company will be worth $2B (4x) in 3+ years.
Catalysts/History
Whole Earth Brands was formed in August 2018 as “Act II Global Acquisition Corp,” a blank-check SPAC which IPOed in April 2019. In June 2020, the company renamed itself Whole Earth Brands in combination with the acquisition of both Merisant and MAFCO. Both companies were subsidiaries of Ron Perelman’s investment company MacAndrews & Forbes. Historically, SPACs have been an option of last resort for companies seeking to raise money. More recently, SPACs have been tremendously popular as an alternative to the lengthy and complex IPO process. Over 300 SPACs have gone public in 2021 and combined have raised more than $100B. With this much activity, investors should rightly be concerned about a SPAC overpaying for an acquisition. But in this instance, circumstances have favored early investors. Last year’s pandemic put Perelman’s investment company in a difficult position and he was forced to raise money in a fire sale[1]. The Act II team was able to renegotiate the acquisition price downwards twice from $450M (equity purchase price) to $388M. Since closing this transaction, Whole Earth has completed two more acquisitions (Swerve and Wholesome) and is now in the process of digesting the new brands to create scale and cashflow.
Market
The global natural (plant-based) sweeteners market exceeded $9B in 2019 and Whole Earth management sees their market growing at 12% annually. The “free from sugar” market (sugar-free) is about $13B and is growing at 6%+ per year. The broader sweetener market which includes sugar, honey and sugar substitutes (i.e. agave, low calorie, etc.) is $14B+. Whole Earth Brands is positioned to ride the current wave of growth in these segments.
Consumers today desire more plant-based food for vegetarian, vegan and flexitarian diets. High sugar consumption has been linked to several types of cancer associated with obesity. Consumers are increasingly selecting food products with natural ingredients to combat health disorders such as Type 2 diabetes, hypertension and obesity. This will drive market growth and, over time, natural sweeteners will take share from these larger markets as consumers are educated on the dangers of sugar and gain awareness of viable alternatives.
Consumer trends are universal and seek food that is fast and convenient, but also healthy and tasty. The complexity in addressing the natural sweetener market comes in providing solutions without compromising on taste, flavor or texture, and without introducing additional health risks from artificial chemicals. If we’re honest, we agree that “healthy food” usually doesn’t taste the same. Whole Earth Brands addresses this problem through selective acquisitions and R&D investment in innovation. There are also significant opportunities to provide solutions to adjacent markets (baking, chocolates, jams, spreads, and breakfast cereals and bars) and in on trend diets (dairy free, low carb, plant based, clean label, and gluten free) while displacing legacy alternative sweeteners that reduce calories but fail to deliver on flavor and experience.
Company
Whole Earth Brands operates in two reportable segments:
Branded Consumer Packaged Goods (CPG) – This segment (consisting of Merisant, Wholesome and Swerve) is the global market leader in natural tabletop zero-calorie and low-calorie sweeteners. Their brands are recognizable and market share leaders worldwide in the US, Europe, Australia, South Africa, Argentina and Thailand.
Flavors and Ingredients (F&I) – The F&I segment (previously MAFCO) is the leading global manufacturer and supplier of licorice derivative and extract products. The predecessor company, MAFCO, is over 170 years old and their products are foundational globally in flavor enhancement, aftertaste masking, and producing the mouth feel modifications that are critical in many products consumers encounter daily. Everything from chewing gum, chewable vitamins, mouthwash, herbal teas to protein powder rely on licorice root derivative enhancers to deliver the final product. Licorice extract is used in Marlboro cigarettes, but more importantly it makes health foods taste better. Cigarettes are their past, health foods are their future. This is an outstanding business because it is a mini-monopoly, recession proof, and revenue is supported by long term contracts which also protect margins.
The company operates an asset-lite business model requiring limited capital investment while generating high free cash flow. Merisant and MAFCO were two longtime privately held businesses which were previously managed inefficiently with profits being funneled to the parent company to pay down debt. From 2018 to 2020 some $73M in profits were funneled to the parent company instead of investing in innovation and growth. As part of Whole Earth Brands, the companies will be nurtured to reach their full potential through a focus on increased volume and distribution and efficient capital reinvestment.
M&A Strategy
Whole Earth commands the largest market share (12.9%) in their vertical and have a tremendous opportunity to consolidate the space. Their philosophy is to acquire businesses on the cusp of breakout, scale the business within their relationship channel, generate cash flow, and then redeploy the cash to reduce debt and pursue new M&A opportunities.
There are notable similarities between the model at Whole Earth and the model at Hain Celestial. The strategy at Whole Earth differs in that Hain developed brands and grew them. In that strategy, there is always a risk that a brand fails to launch. At Whole Earth, they are focused on scaling a sure thing. They acquire brands that already have a strong following (on the cusp of success) and they use their platform to springboard growth through scale and a stringent financial model. The M&A strategy is not about cost cutting and generating synergies. Because of the asset light nature of the business (limited manufacturing operations), there are limited synergy opportunities.
This acquire and scale strategy is especially attractive to their existing distribution partners. Walmart is logically more open to selling new brands when they are backed by manufacturers with whom they already have a strong relationship history. We are seeing this strategy in action as the company has acquired two additional brands since becoming public.
Whole Earth acquired Swerve in late November for $80M, paying less than 10x synergized adjusted EBITDA. Swerve is a fast-growing maker of all-natural sweeteners which have zero calories, zero net carbs and are certified non-GMO and non-glycemic, which means they don’t raise your blood sugar. Swerve bakes and tastes like sugar, caramelizes and holds its shape like sugar, and it measures cup for cup. Swerve has a tremendous cult following for their products and revenue has been growing at 150% CAGR since 2016 despite not having a national advertising campaign.
Whole Earth acquired Wholesome in February 2021 for $180M in cash (7.8x 2020 Adjusted EBITDA). Wholesome is the U.S. leader in organic, plant-based and fair-trade certified sweeteners, including sugar, honey, agave nectar, allulose and other liquid sweetener products. This brand added a large and growing organic sugar category and other complementary products to the portfolio as well as new blue-chip customer relationships. Wholesome holds a 76% market share in the organic granulated cane sugar segment of the organic and natural channel and experienced over 50% sales growth in 2020.
Whole Earth management notes that they have a full pipeline of attractive and actionable M&A targets.
Is this a growth business or not?
Income statement reflects a “GDP+” growth type business with management guiding to mid-single digit organic revenue growth for the next 3 to 5 years. However, the truth growth and opportunities for the business are hidden behind combined company financials and through strategic M&A. The Whole Earth and Pure Via natural non-sugar sweetener brands have grown in excess of 70% year over year from the first half of 2019. The two recently acquired companies (Swerve and Wholesome) are also growing at tremendous rates. Legacy brands such as Equal and Canderel have flatlined primarily due to the Covid impact on the food service industry. Additionally, certain legacy markets are being deemphasized (i.e. international tobacco) as they face regulatory headwinds and this poses a drag on overall performance. Over time, the underlying growth within the innovation brands will begin to shine for investors. Today, the legacy business is essential. They are slow growth, but provide cash flow for R&D and acquiring new high growth brands. Eventually, business segments such as MAFCO are likely to be divested as they are not essential to the core strategy.
Management
Irwin D. Simon (61), Chairman of the Board of Directors – Irwin D. Simon is the high-profile name associated with the business. He is known as the founder of Hain Celestial and was responsible for growing Hain to $2.5B in revenue primarily through an acquisition strategy. He navigated the company through a financial scandal from 2015 to 2018 (they were found clear with no required restatements). However, Irwin eventually stepped down and, after a brief break, decided to embark on his Second Act (thus, the name of the SPAC – “Act II Global Acquisition Corp”) with Whole Earth Brands where he is Executive Chairman of the Board of Directors. His presence is important to the investment thesis as he has a proven game script as well as deep relationships across channels and customers. Simon is very involved as evidenced by his presence on earnings calls which is highly unusual for Board Members.
Albert Manzone (57), Chief Executive Officer – Manzone is the CEO of Whole Earth and is responsible for boots on the ground operations and execution. He has been with the company since 2016 and is responsible for turning the Flavors Holdings legacy business from a double-digit decline in 2016 to positive sales and EBITDA growth.
Andy Rusie (46), Chief Financial Officer – Andy Rusie has been CFO of Whole Earth Brands since its IPO and he served as CFO of subsidiary Flavors Holdings since December 2019. Mr. Rusie spent most of his career at Mead Johnson Nutrition, serving in a number of finance leadership roles across various corporate functions.
Valuation
In addition to the prospective growth opportunities, Whole Earth commands an attractive valuation on most metrics relative to industry peers.
Based on $54.5M in adjusted EBITDA for 2020 and an expected $85M in adjusted EBITDA for 2021, Whole Earth currently trades at a reasonable 13x 2020 EBITDA and 8.2x 2021 EBITDA. Peers within the space trade at 16x to 21x trailing EBITDA and 13x to 17x forward EBITDA. This represents a reasonable margin of safety. If the company traded in line with peers, shares would be worth $22-$28. Management’s goal is to achieve $1B in revenue in 3-5 years. This will require a combination of organic growth, brand scaling, and M&A. The company entered 2021 at a $500M revenue run rate. Upon reaching $1B in revenue, Whole Earth could easily command a $2B market cap based on comps, which is a 4x return from here.
Current valuation also highlights their sound approach to M&A. They completed the Wholesome acquisition at a 7.8x adjusted EBITDA multiple and Swerve for 10x trailing adjusted EBITDA. When this additional cashflow is added to the income statement, it will be credited at Whole Earth’s current 13x multiple.
Current financials along with management projections.
There are 38.4million shares outstanding along with 20.2M in warrants. Two warrants are equal to one share of common and so the fully diluted share count is 48.5M. There are also 4.5M remaining sponsor shares; however, the stock price needs to reach a $20 VWAP to move from escrow to the float. In September 2020, the Board announced a $20M stock buyback program which can reduce total share count moving forward.
Risks
- Leverage – At the close of 2020, Whole Earth had $16.9M in cash and $179.7M in debt. Subsequently, the company entered into a term loan of $375M to complete the acquisition of Wholesome for a net debt to Adjusted EBITDA ratio of close to 10x. Management expects to reduce leverage to 4.0x Adjusted EBITDA by the end of 2021.
- Bandwidth – Irwin Simon’s involvement with the company should not be over or understated. His vision and relationships are critical for the long-term success of the business. His time is currently stretched as he is CEO or Board member for 5+ companies.
Conclusion
Whole Earth Brands is an attractive, undervalued, asset-lite, high cashflow business consolidating a fragmented market positioned to ride the global wave of healthy eating trends. The company is led by industry veterans with the relationships and execution capability to succeed. The strategy that management is employing is not new. What is new is they are focused on tackling a relatively boring industry that is being disrupted by new innovations that promise to improve the health and wellness of consumers. We see sweet things ahead.
Disclaimer
The information contained herein reflects the opinions and projections of Richie Capital Group, LLC and its affiliates as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. We have not obligation to update the information contained herein and may buy, cover, or sell shares at any time for any reason. Richie Capital Group does not make any representation or warranties as to the accuracy completeness or timeliness of the information herein or that any opinion or projection will be realized. All information provided is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any spec
[1] https://www.bloomberg.com/news/articles/2020-09-18/perelman-selling-almost-everything-as-pandemic-roils-his-empire
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