Strauss Group And Texas Pacific Group: Closer To Strauss Coffee IPO
By Alex Gavrish, Etalon Investment Research | Author of "Wall Street: Back To Basics"
Possible IPO of Strauss Coffee On March 23rd, 2015, Strauss Group reported fourth quarter and annual 2014 financial results. In addition, company disclosed that on March 20th, 2015, it filed a draft confidential prospectus with the SEC (currently non-public) in preparation for a possible IPO of its coffee business. With regards to possible IPO, Strauss Group reported that it reached an agreement with Texas Pacific Group on such issues as the IPO process and shareholders' rights. We highlighted Strauss Group as an attractive investment opportunity back in December of 2013, and believe that as conflict with TPG seems to be resolved, IPO of Strauss Coffee is closer (although not guaranteed), and an excellent investment opportunity is still available for long-term, value investors. Company profile Strauss Group is a Food and Beverage Company, focused on high value-add, branded products. The group is an international corporation with a strong home base in Israel, where it is the second-largest food and beverage group. Overall, Strauss operates 29 production sites in 22 countries around the world, including Brazil - where it is the largest coffee player; and the U.S. - where it leads the category of refrigerated fresh dips and spreads, including hummus. Strauss has strategic and financial collaborations with leading global players, such as Danone, PepsiCo, Haier, Virgin and the global private equity firm TPG Capital. Strauss Coffee business Private equity firm Texas Pacific Group owns a 25% stake in Strauss Coffee, in partnership with Strauss Group. TPG bought its stake in 2008 for $293 million while the controlling share is owned by Strauss Group. Perhaps a buyout by German consumer products conglomerate Joh. A. Benckiser in 2013 of DE Master Blenders 1753 NV, a European coffee and tea company, for about $10 billion has ignited a desire on part of Texas Pacific Group to exit the venture. Strauss Coffee value DE Master Blenders transaction was done at an EV/EBITDA multiple of x16.2. Considering that Strauss Coffee is the world's fourth largest coffee manufacturer after Nestle SA, Kraft Foods Group Inc/Modelez and DE Master Blenders 1753 NV, with strong presence in large emerging markets such as Brazil and Russia/CIS, a similar valuation multiple is justified and can even be higher due to attractive growth prospects. Applying a x16 EV/EBITDA valuation multiple for Strauss Coffee values the business at $2,176 million (based on a 2013 EBITDA of NIS 476 million and exchange rate of 3.5 NIS/USD); and $1,668 million (based on 2014 EBITDA of NIS 417 million and exchange rates of 4.0 NIS/USD). Due to significant volatility in currencies, for example in Russia and Ukraine, we believe that last year results do not reflect the real potential of the coffee business. Taking a midpoint of the values calculated above, Strauss Coffee can be valued at about $1,922 million. Strauss Group's stake of 75% can be therefore valued at $1,442 million. This amount represents 90% of company's current market capitalization. Valuation summary Based on a recent share price, Strauss Group had maket capitalization of NIS 6,437 million, non-GAAP net debt of NIS 1,688 million and enterprise value of NIS 8,125 million. Company is currently valued at an EV/EBITDA multiple of x8.4 based on non-GAAP 2014 EBITDA of NIS 964 million. Needless to say, this is a very attractive valuation for a food and beverage company. Conclusion
In my recently published book Wall Street Back To Basics, I discuss decision framework for investing in spin-off companies. Although not a classical IPO but a partial carve-out, the possible IPO of Strauss Coffee can help unlock value for Strauss Group shareholders. Once value of the coffee business will become clear, Strauss Group itself will be revalued by the market. At the same time, current valuation provides long-term, value investor an attractive investment target with an asymmetric risk-return profile.
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