The J. M. Smucker Company (SJM - Free Report) has decided not to proceed with the planned acquisition of Wesson oil brand from Conagra (CAG - Free Report) – deal that was announced back in May 2017. Both companies have mutually decided to call of the $285-million deal, following the U.S. Federal Trade Commission’s ("FTC") administrative complaint against the planned acquisition (filed on Mar 5).
The FTC was of the opinion that the inclusion of Wesson cooking oil in Smucker’s portfolio would lower competition and create Smucker’s monopoly in the canola and vegetable oils space in the United States. This is because Smucker already owns Crisco brand, which currently competes with Conagra’s Wesson oil brands. Notably, the neck-to-neck competition between these staple brands keeps prices of their products under check.
However, had the deal materialized, Smucker would control at least 70% of the branded canola and vegetable oil sales to grocery stores and other retailers. Thus, the merger of Wesson oil brands and Crisco would clearly wipe out their existing competition — thereby giving Smucker a considerable edge to raise prices. Per the FTC, Smucker’s strengthened negotiating power would be a hindrance for retailers (traditional grocers in particular) and ultimately for customers who would have to bear the brunt of higher prices of branded canola and vegetable cooking oil.
The Road Ahead for Smucker Post FTC Allegation
While the FTC’s charges address the concerns of retailers and consumers, Smucker stated that it doesn’t agree with the FTC’s inference. Also, per Smucker, the FTC was unable to assess the contribution of private label brands in the oils space — which account for about half of the total cooking oil sales and hold solid market share at some retailers. Management further revealed that this deal was likely to generate noteworthy cost synergies — which would protect the competitive position of branded oil products.
Incidentally, when the deal was announced, Smucker expected annual net sales of $230 million and additional adjusted earnings of 10 cents per share in the first full year of the closing of the buyout. The company also projected annual cost synergies of about $20 million within two years of the closing of the deal.
However, despite being disheartened with the FTC’s conclusion, Smucker and Conagra decided to abort the plan. This is because both companies were not in favor of investing the considerable amount of time and resources it would need to counter FTC’s charges. Nevertheless, Smucker remains focused on enriching customers’ experience with its Crisco brand and oils business.
Markedly, Smucker’s top line has been gaining from its focus on strategic partnerships, buyouts and improved performance of its brands. To this end, Smucker teamed up with quite a few coffee companies. Its agreement with Keurig Green Mountain and Dunkin’ Brands Group to manufacture and sell the K-Cup category of products, has been yielding positive results since fiscal 2016. The company has been consistently extending partnership with KGM to augment K-Cup business opportunities.
Further, the growing popularity of certain brands has encouraged the company to undertake innovations. Notably, management stated that products launched over the past three years delivered net sales growth of nearly 7% during the third quarter. Additionally, the company plans to introduce Milk-Bone Puffs dog treats and Dunkin' Donuts coffee canisters by the end of fiscal 2018.
Driven by such factors, this Zacks Rank #2 (Buy) stock has rallied 22.7% in the past six months, as against the industry’s dip of 0.8%.
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