By Bart Taylor | Nov 30, 2015
The $975 million price tag, including $265 million in debt, is 29X net earnings (EBITDA), a staggering multiple, especially for a company that’s struggled lately to maintain sales 'velocity’ for some of its brands. In early summer, when Boulder Brands announced that Stephen Hughes, the company's CEO, would be leaving, analysts assumed the worst, at least in the short term. TheStreet's David Peltier said this:
"You certainly don't want to step in and try to buy Boulder, where the previous CEO left on a sour note. It will likely take a few months to find a permanent replacement, the core Smart Balance brand is not performing well and the steam has come out of the expected growth of its gluten-free brands. . . . The company is no longer a growth story and even though the stock has fallen 36% so far this year, at north of 20X expected full-year earnings, it isn't cheap enough yet to attract value investors."
Right. So why the huge deal?
Certainly Pinnacle covets a newer more progressive portfolio, featuring more gluten-free, natural, and organic brands. Boulder’s the national epicenter for innovation and brand development in the sector, so on one level it’s no surprise for those paying attention.
"The conventional players understand they have to evolve or get left behind," says Ross Shell, CEO of Boulder-based Red Idea Partners, a venture firm focused on early-stage natural food companies. "The valuations on these transactions may seem high, but these deals are based far more around future growth expectations. The hope is that the growth potential plays out handsomely over time to justify the valuation," he explains.
But a billion dollars worth of healthy burritos and gluten-free spreads? Wow. Are we seeing Colorado’s influential sector reach a tipping point, where the quiet innovation that’s been ongoing here suddenly translates into a string of mergers and acquisitions with heady valuations like the Boulder Brands deal?
Bill Capsalis, president of influential trade group Naturally Boulder, doesn’t go that far but agrees with the premise. "We can expect to see more of this type of activity in the near future," he says. "This investment validates what we've known for a long time - that there’s a food revolution going on."
It’s also a very active M&A market; deal-makers describe it as 'frothy'. And while 30X deals are the exception, today it's a seller’s market for companies with a healthy balance sheet, regardless of sector.
Frothy or not it’s a good guess that Colorado’s transcendent food sector is set to reap the benefits of at least a decade of incredible creativity and entrepreneurship. And craft beer may be next.
Of course, the big difference is that no major brand from Colorado’s first movers has yet to be fully acquired. Oskar Blues created a stir several months back by divesting a controlling interest, but details remain very closely guarded. The community is so tight that the fear of blowback from 'selling out’ remains a barrier. For many, the tie that binds craft brewers to loyal customers is local ownership.
But consider the multiples that may be in play. Last year a Wall Street Journal article theorized that craft-beer makers are worth roughly $1,000 per barrel of annual production, a number as gaudy as 30X EBITDA. And that was a year ago. The craft beer movement has accelerated at least as fast as the natural and organic trend -- and the big craft beer brands arguably carry more weight than those in food.
Is New Belgium a billion-dollar brand? At $1,000 per barrel, it will reach that threshold this year. At that rate, Colorado’s beer landscape is also littered with $50 million and $100 million craft brands, from Oskar Blues to Odell to Left Hand to Breckenridge to Great Divide.
But as much as AB or Molson Coors would like to emulate Pinnacle Foods, we’ll likely be waiting a good spell to find out.
Bart Taylor is publisher of CompanyWeek. Reach him at email@example.com.