The deal
On 10 October, cereal giant Post Holdings announced that it has agreed to acquire Perfection Pet Foods, a manufacturer and packager of private label and co-manufactured pet foods and baked goods, for $235m.
The acquisition includes two manufacturing facilities in Visalia, California, providing Post with additional capacity to insource a portion of its existing pet food business, as well as an entry point into the private label and co-manufacturing pet food category.
Post says that it expects Perfection to contribute approximately $25m of Adjusted EBITDA in the 12 months after completion, while reducing future capital expenditures previously earmarked for capacity expansion. The acquisition will also create a tax benefit of around $20m for Post.
The deal is expected to complete in Q4 of the calendar year 2023.
Why it matters
The acquisition of Perfection reflects the early success of Post’s incipient pet food division, which began back in February with the acquisition of several brands from J.M. Smucker in a deal valued at around $1.2bn. That deal included six brands - Rachael Ray, Nutrish, 9Lives, Kibbles n’ Bits, Nature’s Recipe and Gravy Train, as well as related private label assets.
Post is already reaping the rewards for this entry into the pet food category. The company said at the time of the Smucker deal that it anticipated a $100m earnings boost from the deal in the year after completion. However, speaking to analysts after the company’s Q3 results in August, CEO Rob Vitale said that the pet food margin realisation from the acquisition was already “exceeding expectations.”
Pet food contributed $275.3m to its net sales total for the quarter ended 30 June, with Vitale saying: “Our expectations for its contribution have increased in the short term and meaningfully more so once we move past full integration and synergy realisation.”
Now, Post's move for Perfection signals an expansion into new growing segments within the pet food category.
In the company’s M&A call on 8 February, shortly after announcing its intention to acquire Smucker’s stable of brands was announced, Vitale said: “In recent years, premium and super premium have seen terrific growth, frankly, at the expense of some of the brands we are buying. More recently, mainstream and entry premium have gained traction as consumers have shifted to value. We expect this to persist for some time. Hopefully, over time, we will expand into additional price points.”
The latest move into private label and co-manufacturing heralds this expansion into “additional price points”, as the wider pet industry seemingly bifurcates into two markets: superpremium and economy. An analysis of the pet industry back in Spring by investment firm Cascadia Capital noted that while premiumisation continues to thrive, private-label pet foods and treats were picking up share, as more consumers across income levels seek cost savings. Unsurprisingly, private label unit share growth (1.47%) in the first three months of 2023 was highest for low-income shoppers.
“Perfection Pet nicely complements our recent acquisition of several pet food brands by enabling us to compete in additional segments and more effectively leverage the combined manufacturing footprint,” Vitale said in a statement.
Post also believes that Perfection will afford it extra manufacturing capacity to insource a portion of its current pet food business.
Bryan Jaffe, managing director at Cascadia Capital, told Just Food: “Scale mass market pet food relies on insourcing to support margin and product continuity and availability. Major market players have invested billions of dollars throughout the Covid period to bolster the durability of their supply chains. Simplistically, you can't sell what you don't have, and no one will look out for a company's best interest like the company itself.”
He added: “Further, Perfection Pet Food's west coast location and export capabilities supported its value proposition to an acquirer."
Post’s venture into private label and co-manufacturing will also add another revenue channel to its pet food division by making pet food on behalf of other companies.
Pet food - an attractive category for CPG companies
More widely, the pet food category in the US has proved remarkably resilient in spite of inflationary price increases and has not seen the same weakness in growth volume sales growth as seen across total FMCG (a forecasted 0.75% year over year) in 2023. Pet care volume sales growth in the US, by contrast, is forecasted at 1.9% year over year for 2023, according to estimates by GlobalData, Just Food’s parent company.
Alice Popple, consumer analyst at GlobalData, also notes the promising longer-term growth in the pet food category: “The recent news that Post Holdings has acquired Perfection Pet Foods for $235m is indicative of the opportunistic pet food market. The dog and cat food and treats market in the US is forecast for strong growth through to 2027 with a CAGR of 3.35% from 2017, with dog treats accounting for the largest growth of 4.7% in the same period," she said.
M&A has been strong in the pet food segment in recent times, with companies attracting healthy multiples from acquirers in light of a worldwide shortage of pet food.
Notable recent deals include General Mills Inc’s acquisition of Blue Buffalo Pet Products Inc for nearly $8bn, Mars Petcare’s acquisition of Champion Petfoods, and Clearlake Capital Group’s takeover of Wellpet. And in August of this year, private equity firm PAI agreed to buy pet food manufacturer Alphia Inc from its owner J.H. Whitney Capital Partners for a reported value of $1bn.
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