The deal was worth about $4.6 billion excluding debt, with Jif peanut butter maker Smucker paying Hostess shareholders $34.25 per share (all figures US$). The cash-and-stock offer represents a premium of 54 per cent on the stock since the day Reuters reported the company was exploring a sale.

Hostess shares have surged 27 per cent since the report about the sale process and were up 19 per cent at $33.49 in early trading on Monday, while Smucker’s shares were down seven per cent as investors viewed the deal as too expensive.

Smucker said the deal, which is expected to close in the third quarter of its current fiscal year, represents adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of about 17.2 times based on its estimate of Hostess Brands’ 2023 results.

Campbell Soup’s recent acquisition of Rao’s sauce maker Sovos Brands represented an adjusted EBITDA multiple of 14.6 times, including run rate savings, and 19.8 times excluding those. The food and tobacco sector currently trades at a 14.4 projected 12-month EBITDA on average, LSEG data shows.

“We can’t say we love this transaction from SJM’s (Smucker’s) perspective. First, the price is high; we are very surprised that SJM (or anyone) is paying this amount,” JPMorgan analysts said in a note on Monday.

Smucker’s bet on Hostess comes as major U.S. packaged food companies look to expand their brand portfolios with pandemic-era fortunes dwindling.

In recent months, the U.S. packaged food industry has seen an uptick in mergers as most of the companies seek to improve volumes by rebranding portfolios after benefits from price hikes started wavering.

Culmination of turnaround

Hostess Brands became an acquisition target after its price hikes boosted revenue but fueled investor concerns over its prospects with its volume growth consistently declining.

The tie-up between Smucker and Hostess follows a spate of other deals in the sector, including Campbell’s $2.7 billion deal for Sovos and Unilever’s purchase of premium frozen yogurt brand Yasso in North America.

Based in Lenexa, Kansas, Hostess was founded in 1930 and is behind several iconic household brands, including Ho-Hos, Ding Dongs, Zingers, and Voortman cookies and wafers.

The deal with Smucker represents a major turnaround for Hostess, which has filed for bankruptcy twice, in 2004 and 2012, due to a combination of private equity owners saddling it with debt and failing to come up with new snacks that appealed to consumers.

Entrepreneur Dean Metropoulos and private equity firm Apollo Global Management returned Hostess to the stock market in 2016 through a deal with a special purpose acquisition company backed by the private equity firm founded by Alec Gores.

By the end of 2020, Hostess had revamped its portfolio and was generating revenue of over $1 billion, an important landmark in its turnaround efforts. It has managed to keep its revenue growing, sometimes by raising prices as sales volumes weakened.

Smucker, which also houses coffee and pet food brands, has a market valuation of over $14 billion and had raised prices of its jams and jellies, which helped boost its profit forecast for the year.

— Reporting for Reuters by Ananya Mariam Rajesh in Bangalore and Anirban Sen and Abigail Summerville in New York; additional reporting by Dimpal Gulwani in Bangalore.

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The deal marks the conclusion of a drawn-out auction that started in February and attracted interest from several private equity firms. Reuters reported on Tuesday on a so-called earn-out agreement that was key to Roark clinching a deal for Subway.

For the full deal price to be paid, Subway’s cash flow would need to reach certain milestones over a period spanning two or more years after the deal closes, according to the sources. Without the earn-out, the deal is worth $8.95 billion, the sources said (all figures US$).

Earn-out structures, while uncommon in the consumer and retail sector, are increasing in frequency in a challenging market for mergers and acquisitions as a way to reconcile price differences.

The sources said the arrangement helped bridge a gap in the valuation expectations between Roark and the DeLuca and Buck families that own Subway, which started up nearly 60 years ago in Connecticut.

The families were hoping to fetch more than $10 billion for Subway based on its strong brand and international growth, but the private equity firms countered it was worth less because they deemed its U.S. business saturated.

Roark prevailed over a rival bidding group led by buyout firms TDR Capital and Sycamore Partners, whose final offer was for $8.75 billion including an earn-out, and $8.25 billion without, the sources said.

Roark, which owns other restaurant operators and franchises — including rival U.S. sandwich chain Jimmy John’s — will pay Subway’s owners a break-up fee equivalent to four per cent of the deal’s value should antitrust regulators thwart the deal, one of the sources said.

The deal contact allows for 12 months for the transaction to be completed, according to the sources.

Roark took the view that the restaurant market is too fragmented for the deal to raise competition concerns, the sources added.

Jimmy John’s has more than 2,600 restaurants in 43 U.S. states. Subway has more than 37,000 restaurants in over 100 countries, including 21,350 in the U.S. and 3,135 in Canada.

Roark and Subway, which announced the deal on Thursday, declined to comment on the terms.

Roark currently controls Inspire Brands, the owner of restaurant chains including Jimmy John’s, Arby’s, Baskin-Robbins and Buffalo Wild Wings.

Its experience of helping restaurant brands grow will be helpful, “especially in the U.S. market where it remains well below the peak it hit a few years ago,” said Neil Saunders, managing director of market research firm GlobalData.

Revamping operations

Tax considerations were part of the calculus to sell Subway. This is because the estate of co-founder Peter Buck, who passed away in 2021, donated his 50 per cent stake in the privately-held company to his philanthropic foundation under the terms of his will. This offers a shield from taxes on the sale of the stake.

Founded in 1965 by 17-year-old Fred DeLuca and his family friend Buck, Subway has been owned by the founding families since its first restaurant opened as “Pete’s Super Submarines” in Bridgeport, Connecticut.

The Milford, Connecticut-based company has been revamping its operations to deal with outdated decor and $5 deals on foot-long sandwiches that eroded franchisees’ profits. In 2021, the chain launched a menu overhaul and splashy marketing campaign as it embarked on a turnaround plan that has helped sales grow.

Subway, which has closed thousands of U.S. locations since 2016, said a year ago that it wants to shift away from its current base of small franchisees that own just one or two shops, which tend to be family-run and sometimes barely scrape by.

The company saw a 9.85 per cent increase in same-store sales in the first half of 2023. Its 12-month earnings before interest, taxes, depreciation and amortization are around $800 million, according to the sources.

— Reporting for Reuters by Anirban Sen and Abigail Summerville in New York and Deborah Sophia in Bangalore.

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There is no certainty that Viterra, part-owned by Switzerland-based mining and trading giant Glencore, will be able to reach an agreement on the terms of a deal, the source said, requesting anonymity as these discussions are confidential.

The structure of the deal is still yet to be finalized and is being discussed by both parties, sources said.

Shares of Bunge were trading at $93.76 apiece on Thursday, valuing the company at about $14 billion (all figures US$).

Global commodities merchants have built up cash reserves after turning in hefty profits over the past year as Russia’s invasion of Ukraine disrupted shipments and crop prices soaring.

Traders like Bunge and Viterra make money buying, selling, storing and processing crops, often capitalizing on supply disruptions caused by crises like drought or war.

A merger with Bunge would put Viterra among the top tier of global grains merchants, which include giants like Cargill and ADM, with access to export terminals in the U.S., one of the largest grain producers and suppliers.

Viterra bought U.S.-based Gavilon from Japan’s Marubeni last year for $1.1 billion, giving giving it significantly more physical grain handling assets in the U.S. and making it the third-largest exporter of soybeans in Brazil, where Bunge already has a strong presence. Gavilon rebranded to the Viterra name in February this year.

Viterra, formerly known as Glencore Agriculture, made headlines in 2017 for a failed takeover approach to Bunge, one of the giant names of global grain trading, then valued at $11 billion.

In May 2017, Bunge rebuffed Glencore after the latter made an informal approach to discuss “a possible consensual business combination.”

Bunge’s Canadian businesses today include oilseed crushing and processing and a joint stake in Prairie grain handler G3 Canada.

The Viterra brand dates back to 2007, when Canadian grain firms Saskatchewan Wheat Pool and Agricore United merged under the new name, followed by a takeover of Australia’s ABB Grain in 2009.

Viterra’s owners other than Glencore today include Canadian pension funds B.C. Investment Management Corp. and CPP Investments, which together hold 50 per cent.

Glencore has publicly said it was reviewing options for its interest in Viterra, looking to unlock more value.

Glencore, Viterra, and Bunge declined to comment. Bloomberg first reported on the talks between Viterra and Bunge.

— Reporting for Reuters by Anirban Sen; additional reporting by Deep Vakil in Bangalore, Gus Trompiz in Paris, Clara Denina in London and Karl Plume in Chicago.

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