The presence of Engaged Capital should improve accountability and encourage management to seek stockholder-friendly outcomes.
We view the news that activist Engaged Capital has taken a 10% stake in no-moat Hain
positively. The fund nominated seven candidates to Hain’s board, and media reports indicate that the fund plans to push for a sale of all or parts of the business while also suggesting operational improvements. While we do not plan to alter our $41.50 per share fair value estimate, we expect the activist presence to improve accountability and encourage management to seek stockholder-friendly outcomes after a series of missteps that led shares down from the mid-$50s just before Hain’s recent accounting troubles.
Zain Akbari, CFA, is an equity analyst for Morningstar.
For a full sale, suitors could look to Pinnacle’s purchase of Boulder Brands in 2016 as a proxy. Pinnacle paid 16 times EBITDA for a business that was also troubled upon purchase. For Hain (using our $348 million fiscal 2018 adjusted EBITDA target), that multiple corresponds to a takeout price around $47 per share, a low-teens premium to our fair value and about 20% over trading levels that incorporate a high-single-digit rally on June 30. Alternatively, Danone paid roughly 20 times our forward EBITDA estimate for WhiteWave, a firm with stronger brands and execution. That would correspond to around $60 per share for Hain, a 45% premium to our valuation and 55% above current trading.
We think asset sales could lead Hain to divest its personal-care business (including the Jason, Alba Bontanica, and Live Clean brands), which accounted for 6% of fiscal 2016 sales (around $175 million). While the unit gives a foothold in Canada and we believe there are synergies between Hain’s food and personal-care items, the category is a small part of Hain’s mix, and resources could instead be used to strengthen core food labels. The list of comparable deals is limited, but Clorox paid about 6 times sales (excluding tax benefits) for Burt’s Bees in 2007 and Colgate paid roughly 3 times sales for Tom’s in 2006. This would correspond to a $0.5 billion-$1 billion valuation for Hain’s offerings.
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