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This Bubbling Trend Inspired Archer Daniels Midland’s Latest Buyout

ADM deciding to get into the natural flavors and natural ingredients business is a smart move


An obscure undertow has been shaking things up within the packaged-food industry (albeit mildly) for the past couple of years. With Monday’s announcement from Archer Daniels Midland (ADM), however, it might be time for investors to acknowledge that this particular consumer trend is not only not going away, but is drastically going to change the way ADM and its peers do business.

Archer Daniels Midland adm stock natural food wild flavorAt stake is billions of dollars in revenue from consumers who are becoming increasingly demanding on this divisive front.

That front is “natural.”

The purchase decision Archer Daniels Midland made leaves little doubt as to where the packaged-food maker believes the industry is going. ADM plunked down $3.1 billion to acquire Wild Flavors, a privately held, Germany-based provider of natural food flavors and ingredients. According to data from Thomson Reuters, ADM is paying approximately 16.4 times Wild Flavors’ trailing income, implying an annual profit of roughly $190 million.

While the offer has been seen as a bit on the frothy side, the move puts Archer Daniels Midland into the fast-growing natural/organic ingredient market, where it had no meaningful presence before.

What’s at Stake for Archer Daniels Midland?

Contrary to popular belief, natural foods and flavors aren’t just a distracting, niche business anymore. According to data from food market analysis firm RTS, natural food ingredients are a $12.9 billion industry.

The market still is dwarfed by the $4.4 trillion packaged food market where ADM, as a grain commodity supplier, has a much stronger presence. But the all-natural sliver of the food market, is growing at a much faster clip than the rest of the food business — RTS predicts annualized growth of 2.8% for the overall packaged food market for the foreseeable future, while Research and Markets anticipates the global natural food coloring and flavor market to grow at an annul clip of 6.3% through 2018.

The disparate forecasts aren’t tough to believe.

While the push for healthier — and safer — ingredients has been underway for years, it has come to the forefront within the past couple of years. Driving these trends are a combination of (1) growing concerns that genetically modified food-plants may pose health risks, (2) growing shopper scrutiny of the required list of ingredients on the back of food packages, and (3) the growing size of the human race’s waistlines.

Sick and tired of feeling sick and tired, consumers are finally putting their money where their mouth is, making the migration to healthier, more sustainable diets.

As proof of the fat-free pudding, the Organic Trade Associations recently reported U.S. consumers shelled out $35.1 billion for organic food in 2013 … an increase of more than 11% from 2012’s market size.

All indications are for similar growth this year, and for the next several years.

The Takeaway

Given the undertow favoring natural flavorings and ingredients, it’s not difficult to understand what Archer Daniels Midland saw in Wild Flavors. In fact, it wasn’t even the first such major acquisition in the natural foods space — that honor arguably belongs to German company Symrise, which paid $1.8 billion for natural ingredients player Diana Group in April of this year.

Regardless of who came first, two M&A deals in the same space just three months apart suggests we could be at the onset of a wave of buyouts in the natural ingredients and flavors space.

Unfortunately, it’s not a bet most investors will be able to make…. at least not directly.

The natural ingredients space is relatively fragmented, leaving all these players ripe for strategic partnering. Problem: Most of the buy-worthy names in the natural flavoring industry are privately held companies.

Two exceptions to that norm are McCormick & Company (MKC) and The Hain Celestial Group (HAIN).

McCormick makes spices and condiments, and though it doesn’t heavily tout itself as a provider of natural flavors, it has developed a reputation for being “green,” on a corporate level as well as with its products.

The Hain Celestial Group makes a variety of natural and organic food products — including seasonings. It’s a well-respected brand by those who keep close tabs on the organic food industry’s key names, generating $1.7 billion in sales last year. With the backing of a better-known name within the food industry, though, Hain Celestial could conceivably do much more.

That being said, the best way to play the natural flavors M&A trend might not be hunting down the next M&A target; publicly-traded targets in this space are few and far between anyway.

The smart-money move is more apt to be the companies like Whole Foods Markets (WFM) that are already in the game, or the companies doing the acquiring — like Archer Daniels Midland — that see the writing on the wall and are willing to take drastic action.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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