International Flavors (IFF) Seals Merger Deal With DuPont Arm

International Flavors & Fragrances Inc. (NYSE:IFF) has entered into a definitive merger agreement with DuPont’s (NYSE:DD) Nutrition & Biosciences (‘’N&B’’) business unit to form a new entity, focused on creating a leading global integrated solution. The combined entity is valued at $45.4 billion on an enterprise basis.

DuPont’s Nutrition & Biosciences business offers solutions for home and personal care, food and beverage, dietary supplements, energy, animal nutrition and pharmaceuticals markets. It is one of the biggest producers of specialty ingredients. The division accounted for 29% of DuPont’s third-quarter 2019 sales.

Transaction in Detail

Under the terms of agreement, DuPont shareholders will own 55.4% of the newly-formed company, while International Flavors shareholders will hold the remaining. Upon closing of the deal, DuPont will get a one-time cash payment of $7.3 billion. The deal has been approved by the boards of both companies. The combination will be executed through a Reverse Morris Trust transaction.

Detailing of the New Entity

The new entity will be based in New York. It is expected to be a global leader in high-value ingredients and solutions for food and beverage, home and personal care, and health & wellness markets. The newly-formed company will have attractive positions across key growth categories, which include Taste, Scent, Texture, Nutrition, Enzymes, Cultures, Soy Proteins and Probiotics. With expanded global reach and enhanced capabilities, the company will be able to meet customers’ increasing preference for natural and healthier products.

Besides, shareholders will benefit from a highly profitable business with strong cash flow. The company expects to register stellar top-line growth as well as enhanced margins, with further benefit from cost synergies and revenue growth.

Financial Benefits

The integrated company will have estimated current-year revenues of more than $11 billion and EBITDA of $2.6 billion. The company expects adjusted EBITDA margin of around 23% prior synergies and 26% with run-rate cost synergies based on estimated results for the ongoing year. Over the long term, the company expects mid-single digit revenue growth with solid cash-flow generation. Further, the new company will continue to maintain International Flavors’ current dividend policy.

Moreover, International Flavors expects to realize cost savings of around $300 million on a run-rate basis by the end of the third year after closing the transaction. In fact, these cost synergies will be driven by streamlining overhead, procurement excellence and manufacturing efficiencies. Additionally, the new entity’s targeted cost-synergy to deliver more than $400 million in run-rate revenue synergies would result in EBITDA of $175 million, spurred by cross-selling opportunities and leveraging the extended capabilities across a broader range of customers. Also, International Flavors continues to maintain investment-grade rating.

Guidance

International Flavors has reiterated its guidance for 2019. Sales are projected at $5.15-$5.25 billion. Adjusted earnings per share are expected in the band of $4.85-$5.05. Adjusted earnings, excluding amortization, are anticipated between $6.15 and $6.35.

DuPont reaffirmed total annual revenue guidance at $21.5 billion and adjusted earnings per share of $3.77 to $3.82. DuPont expects operating EBITDA to be at the lower end of the previously-guided range, due to temporary supply-chain disruptions in Safety & Construction (S&C) and Electronics & Imaging (E&I).

The transaction is likely to close by the end of the first quarter of 2021 upon approval by International Flavors’ shareholders. Both companies have obtained fully-committed debt financing from Morgan Stanley (NYSE:MS) and Credit Suisse (SIX:CSGN). Upon the deal’s closure, the new entity’s board will consist of the seven current directors of International Flavors and six appointed by DuPont. International Flavors’ chief executive officer Andreas Fibig will run the combined company and also continue to be the board chairman.

Share Price Performance

Over the past three months, International Flavors’ shares have gained 9.6%, compared to the industry’s growth of 1.8%.

Zacks Rank & Key Picks

International Flavors currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Consumer Staples space are e.l.f. Beauty, Inc. (NYSE:ELF) and Newell Brands Inc. (NASDAQ:NWL) , each carrying a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

e.l.f. Beauty has a projected long-term EPS growth rate of 3.8%. The stock has appreciated 19.5% in the past six months.

Newell Brands has an estimated long-term earnings growth rate of 6%. Shares of the company have gained 32.2% over the past six months.

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