Report
Rob Hales
EUR 850.00 For Business Accounts Only

Morningstar | Symrise Acquires ADF/IDF; Nice Bolt-On for the Nutrition Business

After market close on Jan. 31, wide-moat Symrise announced it signed a purchase agreement to acquire ADF/IDF, a leading developer and manufacturer of natural ingredients for pet food and food customers in the U.S. market. We think the deal is positive for valuation and moat, but given its relatively small size, we don’t expect to change our EUR 70 fair value estimate by more than a few percentage points. At current levels, the shares look fairly valued.

Symrise is acquiring ADF/IDF for $900 million, which equates to 17.7 times 2018 estimated EBITDA or 13.3 times including synergies and tax benefits. We have no issues with the company’s adjustments. Expected cost synergies of $7 million are undemanding at 3.2% of ADF/IDF’s revenue and the history with Symrise’s Diana pet food business would indicate some overlap can be taken out. Tax benefits ($130 million net present value) accrue from higher depreciation after the step-up in asset values with acquisition accounting. Financial disclosure on ADF/IDF is light, essentially limited to sales of $220 million and EBITDA of $51 million (23% margin). However, this deal breaks even with around 3% long-term growth, on our estimates. With naturals and pet food being two areas that will likely grow mid to high single digits for the foreseeable future, we see the potential for value creation.

The transaction will be financed by a mix of equity and debt, which we think is prudent. The company’s net debt to EBITDA ratio is currently around 2 times. Full debt financing would push the ratio to around 3.5 times. While we wouldn’t be alarmed with the higher leverage given Symrise’s competitive position and defensive industry, it makes sense to de-risk the transaction by issuing some equity while the shares are fairly valued.
Underlying
Symrise AG

Symrise AG develops, produces, and sells fragrances and flavors as well as active ingredients for the cosmetics industry. Co. operates in two main business segments: The Scent & Care segment, which develops, produces and sells fragrances, cosmetic ingredients, aroma molecules and mint aromas and also develops specific application processes for such substances; and The Flavor & Nutrition segment, which develops, produces and sells flavors that are used by customers in the production of food products (savory and sweet food products as well as dairy products) and beverages.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Rob Hales

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