Ingredion upgrades diet with $100M Kerr buy

In a move indicative of Ingredion Inc.'s (INGR) growing M&A appetite for healthier ingredients, the starch maker is shelling out $100 million for natural juice concentrates maker Kerr Concentrates Inc.

The Westchester, Ill., ingredients giant, which processes corn, potatoes, tapioca and other raw materials into various products, said on Wednesday, July 8, it plans to complete the deal in 30 days.

Ingredion spokeswoman Claire Regan said the company is financing the acquisition with its existing revolver.

"[Kerr] is another step in our strategic blueprint to broaden our portfolio of wholesome, clean-label products," Regan said. "We're going to continue to look for opportunities in this space to grow our specialty ingredients portfolio."

Investment banker Joseph J. Downing Jr. of C.W. Downer & Co. agreed on the the deal's transformative nature for Ingredion.

"When I think about Ingredion, I think about a starch company with some sweeteners, which is more of a commodity," said the managing director and partner at the Boston firm, who advises companies in the food ingredients space.

In a recent deal, Downing led the C.W. Downer team that advised Flavor Infusion LLC, a producer of natural flavor products for beverages, on its sale to Symrise AG on June 5.

"The acquisition of Kerr kind of opens up a new category for [Ingredion]," Downing continued, pointing to a similar move made by Ingredion peer Archer Daniels Midland Co. (ADM) last year.

Archer Daniels on Oct. 1 purchased Wild Flavors GmbH for €2.3 billion ($2.5 billion). The agriculture giant paid about 16.4 times Ebitda for the natural flavors company.

With headquarters in Salem, Ore., Kerr supplies minimally processed fruit and vegetable juice concentrates, purees, formulated products and pomace, as well as California-produced strawberries. The company operates production facilities in Salem and Oxnard, Calif.

While financial figures for the target weren't disclosed, Kerr's annual revenue is roughly $65 million and its gross margins are in the high teens, The Deal has learned.

Ingredion paid about 10 times Kerr's Ebitda, The Deal has learned, implying the target generates Ebitda of about $10 million.

For Ingredion, whose market capitalization sits at about $5.7 billion, the acquisition size falls below the $300 million to $500 million range that it typically targets in deals, noted Vertical Research Partners LLC analyst Sandy Klugman.

While it isn't likely to "move the needle" for Ingredion, Kerr does grow its client base and may be indicative of a larger market opportunity in the future, Klugman explained.

It was only on March 10 that Ingredion received U.S. antitrust approval for its $340 million deal to buy Penford Corp., whose emphasis is on potato starches. Initially announced in October, the deal, which closed on March 11, essentially combined the two largest producers of modified food starches--a staple ingredient in processed foods.

Before the Kerr deal, Ingredion's products stemmed primarily from corn, tapioca and, including the Penford deal, potatoes.

Klugman went on to say that if the appropriate deal presented itself, Ingredion would step outside of that range and hypothetically could pursue a deal valued as high as $2 billion--the maximum level at which Ingredion has in the past stated it could maintain its investment grade.

"It seems that they're probably going to be more acquisitive going forward than in the past," Klugman said, adding that Ingredion likely will use M&A to fuel geographic expansion.

Moody's Investors Service Inc. said in a Wednesday note that the Kerr deal is credit positive but does not affect its stable ratings outlook.

Ingredion had about $573 million in cash and cash equivalents as of March 31, alongside about $2.2 billion in longterm debt.

In the absence of accretive M&A, the company likely will execute larger share repurchases, Klugman added.

Downing, meanwhile, said other smaller, privately owned companies similar to Kerr are on his radar as potentially appealing takeout candidates.

While Downing declined to identify specific targets, a few of those in the space include FruitSmart, a privately held Grandview, Wash., maker of fruit concentrates, seeds and powders; Tampa, Fla., fruit and vegetable concentrate and puree supplier Dennick FruitSource LLC; and iTi tropicals Inc. of Lawrenceville, N.J., which specializes in tropical and exotic fruit purees and concentrates.

The Deal reported in March that likely consolidators in the flavors and fragrances sector include not only Archer Daniels Midland but also International Flavors & Fragrances Inc. (IFF), Listowel, Ireland's Kerry Group plc, Givaudan SA of Vernier, Switzerland, and Holzminden, Germany's Symrise.

Shares of Ingredion, listed on the New York Stock Exchange, remained relatively flat on Thursday, slipping 0.7% to $79.31. Shares dropped 1.8% on Wednesday.

Kerr CFO David Gatti did not return a call for comment.