The J. M. Smucker Company’s (SJM - Free Report) long-awaited plans to divest U.S. baking business have finally taken shape. In yesterday’s announcement, the company revealed that it has entered into a definitive agreement to sell baking business to Brynwood Partner in a transaction worth $375 million. Management believes that the decision aligns well with its strategy to concentrate on other prospective business areas, namely coffee, pet foods and snacking.
Impacts of the Divestiture
The divestiture is expected to be completed by the end of second-quarter fiscal 2019 and is subject to certain closing conditions and regulatory approvals. The deal will exclude certain renowned brands such as Pillsbury, Hungry Jack, Martha White, White Lily and Jim Dandy along with relevant licensing agreements and trademarks from Smucker’s portfolio. Additionally, Smucker will forego the manufacturing facility located in Toledo, OH. Apart from this, the transaction is likely to curtail Smucker’s fiscal 2019 adjusted earnings by almost 25-30 cents per share. However, the downtrend seems dilutive when gains from the divestiture are taken into consideration.
Incidentally, the baking category has been sluggish and hampering the performance of the broader U.S. Retail Consumer Foods segment. Considering this, the company’s decision to divest the unit is justified.
Bolstering Other Businesses
By selling underperforming businesses, Smucker expects to make better use of its resources through investment in other potential categories. Well, the company identifies robust opportunities in its pet products, coffee as well as snacks businesses and intends to concentrate more on these areas. Recently, the company concluded the acquisition of Ainsworth Pet Nutrition, LLC., a renowned name in the premium pet foods segment with popular brands like Rachael Ray Nutrish. This is not the first time that Smucker has undertaken such efforts to strengthen its footing in pet foods. In 2015, the company acquired Big Heart Pet Brand that added iconic brands such as Meow Mix and Kibbles 'n Bits. Moving on, the company has formed key partnerships with coffee companies like Rowland Coffee, Keurig Green Mountain and Dunkin’ Brands Group, Inc., along with other food brands such as Sahale Snacks and Enray Inc. among others.
Smucker’s performance has been unimpressive of late, thanks to lower net price realization across certain segments and higher freight expenses. Such factors have dampened investors’ in this Zacks Rank #5 (Strong Sell) stock that fell almost 10.3% in the past three months against the industry’s rise of 5.2%. Nevertheless, we hope that Smucker’s efforts will boost overall business in the long run and revive the stock’s lost sheen.
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