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J M Smucker (SJM -7%) is adding to its tasty snacks portfolio with a deal to acquire Hostess Brands (TWNK +19%) for $34.25 per share, mostly in cash ($30/sh) but also some stock ($4.25/sh). The deal represents a total enterprise value of approximately $5.6 bln, which includes $900 mln of net debt. SJM currently has a market cap of $14.5 bln, so this is a very large acquisition for them. The deal is expected to close in SJM's Q3 (Jan).

• The transaction includes the Hostess Brands sweet baked goods brands (Hostess Donettes, Twinkies, CupCakes, DingDongs, Zingers etc) and the Voortman cookie brand, along with several manufacturing facilities.
• We definitely see the fit with SJM's portfolio of convenience brands. SJM already has well-known brands in attractive categories, like coffee (Folgers, Dunkin', Café Bustelo), peanut butter (Jif), frozen handheld, fruit spreads, dog snacks (Milk-Bone) and cat food (Meow Mix).
• Part of SJM's rationale for the deal is to accelerate its focus on serving consumers with convenient food/drinks across different meal and snacking occasions. SJM also wants to leverage Hostess Brands' strong positioning in convenience store distribution to help boost sales of its other products. SJM also sees the companies as sharing highly complementary brands and they are very similar in their core business principles and operations.
• In terms of the financials, TWNK will add around $1.5 bln in annual sales, with an estimated mid-single digit percentage annual growth rate. SJM expects annual run-rate cost synergies of approximately $100 mln achieved within the first two years. Adjusted EPS should be accretive in the first fiscal year. SJM also expects strong cash flow from the combined business will enable rapid deleveraging of debt.

Taking a step back, SJM is benefitting from people spending more time at home, and thus eating/snacking at home more often, so adding a snack brand like Hostess makes a lot of sense. Besides more snacking at home, there has also been increased consumption of at-home coffee and the pet category is benefitting from more pets and pet parents than ever as dog and cat ownership both increased significantly during the pandemic.

Overall, we like the deal and see how Hostess fits in nicely with SJM's other brands. SJM really wants to focus on the convenience category and this brand surely adds to that goal. We also like Hostess' strong positioning at convenience stores, which should help SJM get more shelf space for its other products.

In terms of the stock reaction, SJM is trading lower. The deal was not a surprise as there was a Reuters report in late August that TWNK was considering a sale. However, we suspect investors may not like the premium being paid (adjusted EBITDA multiple of 17.2x). Also, TWNK was trading just above $22 and trending lower when the Reuters report hit, so this purchases price represents a 50+% premium from that level.