The deal, announced last night, “marks an important step in [Simply Good Foods’] journey in becoming a broader nutritional snacking company,” by expanding its product portfolio, consumer base and channel distribution, Simply Good Foods’ President and CEO Joseph Scalzo told investors and analysts Aug. 21.
He added it also will contribute “compelling financial returns” by boosting the company’s combined net sales to more than $800m with strong operating margins and significant synergies of $20m annually over the next three years. Most of these savings will come from “leveraging efficiencies of scale” that come from the complementary nature of Quest and Atkins, including shared materials, purchasing, warehousing and distribution as well as the “elimination of duplicate support services,” Scalzo said.
Given these benefits, the deal’s double-digit multiple of 14.3 “appears reasonable,” rather than eye-popping, “especially in light of an escalation of premiums paid by packaged food companies in recent years,” according to Bernstein analysts. They add in a note published Aug. 21 that the multiple improves when the deal's tax benefits are factored in and the purchase price drops to $870m, effectively lowering the multiple to 12.4.
Of the benefits noted by Scalzo, the Bernstein analysts appear most impressed by the expanded consumer base.
“Quest Nutrition targets younger, urban consumers of 18-44 years old, which could be complementary to Atkins’ older, suburban consumers,” they note.
Quest users also tend to be dedicated to exercise with most buying the brand's products to help them gain strength, maintain daily nutrition or replace meals, Scalzo said. This focus on fitness further complements Atkins’ products which tend to be more lifestyle focused.
The Quest acquisition also is strategic because it expands Simply Good Foods’ reach across diverse distribution channels, the Bernstein analysts note.
In this regard, Simply Good Foods called out Quest’s “effectiveness within e-commerce, social platforms, specialty and other non-tracked distribution channels.” Scalzo also noted Quest’s strong blue chip customer base, including Target, Walmart, Amazon, GNC, The Vitamin Shoppe and Kroger, and its “small profitable international business."
Despite its broad reach, Quest is only in about 50-55% of US households, which leaves significant room for growth, Scalzo added.
In exchange for potentially opening doors in these channels, “Quest will benefit from Simply Good Foods’ expertise in building distribution in FDM (food/drug/mass) channels, and growing brand awareness via broad reach media,” according to the company.
A 'scalable' business
Beyond the synergies Quest brings in combination with Atkins, the new acquisition is promising on its own, Scalzo notes.
“We believe Quest is a scalable business with expected net sales in calendar 2019 of about $345m, an increase of mid- to high-teens on a percentage basis versus last year,” he said, also noting the calendar 2019 adjusted EBITDA is expected to be $50m.
The brand also taps into several macro trends that Scalzo says will further fuel the growth of Quest.
For example, he noted that Americans’ health concerns continue to grow with about 40% or 93 million US adults qualifying as obese in 2016 and 12% or 30 million diagnosed with diabetes in 2015. Partly in response to these figures, 67% of Americans said they are limiting sugar and 14% said they are avoiding it.
Based on these trends, Scalzo sees a bright future for the nutritional snacking category that caters to these concerns. He noted that the nutritional snacking category in which Quest plays was estimated at $5bn in IRI measured channels alone and growing at a compound annual growth rate of 11.3% year-over-year from 2014.
Reflecting on this potential and all that Quest has to offer, he concluded that “it is a perfect fit for our growth vision, a good complement to our Atkins brand, and we believe it represents a compelling transaction.”