The Cheddar Bunny Market

I wrote this post back in June following the decision by Annie’s auditor to leave and concurrent questioning by an analyst regarding the possible sale of the company.  It didn’t seem worth posting then.  Maybe now….?

During the heyday of 2006-2007 M&A deals were being signed up at a record pace.  Move forward one year (late 2007 and 2008) and the lawyers came into the spotlight as buyers who had signed deals looked to the lawyers to find a way out of those same deals.  The lawyers focused on a clause commonly referred to as a “MAC”.  A “MAC” meant that the business had undergone a “material adverse change” since the signing of the deal that no longer required the buyer to fulfill its responsibilities to acquiring the target company.  MAC clauses were invoked in deals to acquire Genesco, Huntsman, HD Supply, SLM and Accredited Home Lenders, among others.

Fast forward to 2014 and we see acquiring companies receiving unsolicited bids (Hillshire agreed to acquire Pinnacle Foods and then Tyson launched a bid to acquire Hillshire).  Additionally, Pilgrim’s Pride topped Hillshire’s original bid for Hillshire forcing Tyson to raise its offer.  AT&T is set to acquire DirecTV, Facebook buys anything with a pulse (or at least a virtual pulse), one pharma company is upping its bid almost daily.  But those are headlines.  My one-person office likes to look in areas that aren’t plastered on the front page.

Enter Cheddar Bunnies.  Annie’s is a small, packaged-food company that makes primarily cheddar bunny snacks and mac and cheese.  Their products are in the natural foods and organic space, so they are currently a hot commodity in the market.  Personally, I have no attraction to this company, despite a cupboard full of their products.  The packaged-food business is ultra-competitive and the shift towards better generics (Kroger and Costco) essentially allows your competitors to have all your sales data and to cherry-pick what generics to produce (Trader Joe’s model).

But the merit of the business itself isn’t the story here, but the recent performance of the business and the market reaction.  Last quarter, Annie’s produced fairly mediocre results, not great, but not horrible.  Market value is currently around 30x cash flow or net profits.  This isn’t outrageous for this market, but it is certainly not something I am interested in.  At the time of the year-end results, however, PwC withdrew as Annie’s auditor.  In the filing regarding this change, we read the following:  “except for the material weakness in internal control over financial reporting identified by the Company….there were no “reportable events” as defined in Item 304(a)(1)(v) of Regulation S-K.”  

In other words, “Besides that, how was the play Mrs. Lincoln?”

The company is trading at a fairly lofty number in a space that is fiercely competitive and just saw a hefty new entrant into its market (White Wave Foods).  However, the response from one analyst on its conference call was as follows:

“So can you remind us, what you consider the advantages are of Annie’s as a standalone company versus being part of a larger company?”  In other words, how long before you sell the company?  Signs of a cheddar bunny market…

Current Update:

Turns out about 4 months. General Mills announced that it was acquiring Annie’s this week for $820m in cash.

Compare that with these operating metrics from Annie’s.

Total Revenue for years 2010-2013 (4 years): $729m

Total Operating Cash Flow for years 2010-2013 (4 years): $54m

The only reason to invest in Annie’s is to be bought out by a larger company.  It happened, but this isn’t a great investment strategy.

It reminds me of this story about a famous slot machine that hadn’t paid out in twenty years.  One couple finally won.  Congrats to the couple, but I am not sure it is the best idea to ask them about their “slot playing strategy.”






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