Greystone Capital recently released its Q4 2020 Investor Letter, a copy of which you can download here. Greystone is a privately held investment company. The investment firm seeks to simplify and add value by identifying opportunities in good and bad markets. During the fourth quarter of 2020, returns for separate accounts managed by Greystone Capital ranged from +28.0% to +57.2%. The median account return was +49.1%. You should check out Greystone Capital's top 5 stock picks for investors to buy right now, which could be the biggest winners of 2021.
In the Q4 2020 Investor Letter, Greystone Capital highlighted a few stocks and Whole Earth Brands Inc. (NASDAQ:FREE) is one of them. Whole Earth Brands Inc. (NASDAQ:FREE) is one of the world’s leading manufacturers of zero/low sugar and calorie sweeteners as well as reduced sugar products. In the last three months, Whole Earth Brands Inc. (NASDAQ:FREE) stock gained 44.7% and on January 20th it had a closing price of $12.02. Here is what Greystone Capital said:
"During the quarter I purchased shares of Whole Earth Brands (FREE) for client accounts which now makes up a top six position in most SMAs. Whole Earth recently became public via SPAC, and among the heaping piles of trash or just outright nonsense that has made up most SPAC IPOs this year, the circumstances surrounding Whole Earth – and the reasons why we were able to purchase shares at the prices we were – are some of the most interesting and potentially rewarding I’ve seen among all of the SPACs I’ve looked into this year. We have Matt Sweeney of Laughing Water Capital to thank for introducing me to the business and to the opportunity. I recommend checking out his fund and reading his letters at www.laughingwatercapital.com.
Whole Earth Brands, through their branded CPG segment is the global market leader in natural and freefrom sugar sweeteners and other sweet categories. Recognizable brands include Equal, Pure Via and Canderel, a popular sweetener overseas. Whole Earth also consists of a Flavors and Ingredients segment where FREE produces and distributes natural licorice extract and derivative products utilized in CPG among other industries for flavor enhancement, masking and other benefits. I like this category of products for their stable, recession resistant characteristics, but our investment should also be aided by the strong secular shift toward ‘sugar free’ and sugar substitute products driven by increasing consumer awareness and health trends moving forward.
Today, FREE has dominant market share in France and parts of Europe with its Canderel brand, leading market share in its licorice-based flavorings business, and strong growth brands in its Whole Earth and Pure Via natural non-sugar sweeteners, where the Whole Earth brand category has grown in excess of 70% year over year from the first half of 2019. Moving forward, FREE will be pursuing an acquisition strategy designed to increase market share and distribution capabilities while improving margins. This, combined with moderate organic growth and share buybacks sprinkled in should provide a meaningful tailwind to the stock especially as the story is communicated. These efforts are being overseen by Chairman Irwin Simon of Hain Celestial fame, who grew his natural food and products company to over $2.5B in revenues over a 25-year period.
For all this, FREE is currently trading at less than 1.5x revenues and sub-8x EBITDA, putting the valuation way out of line with slower growing, lower margin CPG companies that don’t possess the balance sheet or runway for growth. A quick glance at the situation – low deal price, SPAC IPO, low valuation – might signal a business of low quality or misaligned founder comp/incentives, but in fact points to the structure of and reasons for the deal price as opposed to a reflection of FREE as a business. Were FREE to trade in line with its packaged food and ingredient peers, shares would more than double from these levels. This is before organic growth, accretive M&A and of course, share buybacks. In addition, any multiple increases would help kick the tires on future stock-based acquisition efforts, but before we get there, buybacks would add meaningfully to shareholder value as FREE trades at a double digit FCF yield. To that end, it was a positive to see management and the board announce a $20mm stock buyback program in September which would potentially reduce the total share count by 7% moving forward.
So getting back to the deal dynamics, why do we happen to be so lucky with this opportunity?
Everything I know about selling a private business has revealed that most of the time, the seller is the smartest person in the room. Those assets are illiquid, transactions take massive amounts of time and brainpower, and very seldom can interested parties (having not been privy to the company’s financials as they are private) step in at the last minute and scoop up the business at a bargain price. The price is the price, and the value of the business is usually based on the future cash flows + the tangible and intangible assets, with exceptions of course.
In the stock market, however, businesses regularly go on-sale for a variety of reasons, sometimes none of which have anything to do with the actual value of the company being sold down. A bargain could be the result of a number of things including liquidity needs, structural constraints, changes in sentiment or possibly the need for a large shareholder to exit.
FREE’s discount comes on the back of that last reason, as the business was sold as part of some recent liquidation efforts involving Revlon chairman and ‘debt king’ Ron Perelman who isin the process of selling off some of his assets following the need to de-lever as a result of pandemic related issues among other things.
To step back for a moment, Whole Earth Brands was formed as a combination of two of Perelman’s portfolio companies – Merisant (sugar free and low-calorie sweeteners) and MAFCO (licorice and licorice extract products) – into one scalable platform that was acquired by previously mentioned Irwin Simon’s SPAC, Act II Acquisition Corp. during 2020. The situation at Revlon seems to be quite messy to say the least, and as Perelman (stated publicly) longs for ‘the simple life’, his need to sell assets to service his company debt load opens up an opportunity for us. What’s even more interesting though, is the purchase price was negotiated prior to the onset of COVID-19, but as the pandemic further magnified Perelman’s issues, the price was negotiated downwards not once, but twice! My assumption for the reason behind that is a simple one. As Perelman became more desperate to raise cash, he had no choice but to accept a lower offer. However, in line with my comments above about private business sellers being the smartest in the room, Perelman is clearly the most knowledgeable seller when it comes to Merisant and Mafco, which is why following the close of the transaction he purchased over three million shares in the open market with the logic that he too was getting a bargain. Then, when the shares did not immediately jump following the transaction, he again had no choice but to sell those shares, which opened up the opportunity for us to purchase our stake at a price below what the most knowledgeable person in the room was willing to pay.
The most attractive part of this dynamic is that FREE, having been released from the Perelman empire, will no longer need to use valuable cash flow from the business to service the Chairman’s debt. I can’t overstate how valuable this now freed up cash will be to the business and the management team overseeing the growth, as FREE can now complement their mid-single digit organic growth profile with accretive M&A set to drive sales much higher moving forward. This strategy has already been put the test as the company acquired Swerve in late November – a fast growing maker of all natural lines of sweeteners – for $80mm. Taking into account expected synergies from the transaction, FREE paid less than 10x EBITDA (without issuing any stock) for a brand that has grown revenues at 150% CAGR since 2016 and significantly bolsters FREE’s market share in the overall sweetener category.
Investors can currently purchase the business for a total enterprise value of around $450mm, which is an extreme bargain given managements 2020E guidance for adjusted EBITDA in the range of $54-60mm which doesn’t include expected cost synergies from both the Swerve acquisition and consolidating their manufacturing footprint (which management is estimating to be over $10mm in total savings). The above estimates also don’t include future acquisitions for which management has shown the ability to deliver on in the past and has the balance sheet flexibility to execute today.
I’m not sure exactly where we end up in terms of intrinsic value within the next 12-18 months, but I’m not sure how precise one has to be when taking into account the above. There seems to be a severe mispricing for this asset light business with strong market and category leadership and stable organic growth with massive secular tailwinds, and a strong management team capable of executing accretive M&A or using excess cash to repurchase shares. I like the setup here and feel optimistic about the potential for good returns moving forward."
In Q2 2020, the number of bullish hedge fund positions on Whole Earth Brands Inc. (NASDAQ:FREE) stock increased by about 53% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in FREE's growth potential. Our calculations showed that Whole Earth Brands Inc. (NASDAQ:FREE) isn't ranked among the 30 most popular stocks among hedge funds.
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