Will Post Holdings Lay an Egg With This Acquisition?

No stranger to making big acquisitions, Post Holdings (NYSE: POST  ) is rumored to be angling to make another one, this time egg and dairy producer Michael Foods for around $2.5 billion. But having bought a handful of companies already over the past year alone, this one would be its largest in recent memory, and the growth-by-acquisition strategy could backfire if the buyout goes awry.

Source: Michael Foods.

Michael Foods is a top-tier producer and distributor of specialty eggs, a division that accounts for almost three-quarters of its $1.4 billion in revenues, with other lines being refrigerated potatoes, cheese, and other dairy products. Revenues at Michael rose almost 5% in 2013 on the strength of its egg and potato business, helping to offset declines it incurred in cheese, and generating net earnings of $50.4 million, a 67% increase year over year.

Michael was acquired by Goldman Sachs for about $1.7 billion in 2010, which earlier this year began peddling the egg layer for a sale. While there were a number of potential buyers, Reuters reports that Post and Tyson Foods  (NYSE: TSN  )  have emerged as the most probable. Yet where Tyson hasn't made such a big purchase in over a decade, Post made five different transactions in the past 12 months alone, though none anywhere near as large as this. 

Post rearranged its operations into three segments: its ready-to-eat cereal business, the premium organic cereals and snacks it acquired from Attune Foods in December 2012, and the active nutrition segment that markets protein bars, shakes, and nutritional supplements as a result of its Premier Nutrition acquisition last September. This past February, Post bought the Powerbar business from Nestle. It's not exactly clear where an egg, potato, and cheese business would easily fit.

According to the Egg Industry Center, annual per capita consumption of eggs has been on a steady decline since 2002, falling from 256 eggs to 247 in 2011, or about 1% annually. At the same time, feed costs have run more than 12% higher annually, going from $130 per ton to $290 per ton, though the rate of increase has eased up somewhat in more recent periods.

To buy Michael, Post will be incurring the risks of the industry as well as the significant amounts of debt the specialty egg producer holds, which at Dec. 31 stood at $1.2 billion. It also has some potential outstanding liability arising from class action lawsuits that were filed against Michael and other producers for price fixing, and though one claim has been settled, the others remain outstanding.

Almost all of Post's growth has been as a result of acquisitions -- 80% last year alone -- and a new purchase of such size and unnatural fit lends itself to creating difficulties for the cereal maker. It reported losses of $5 million, or $0.15 a share, in the first quarter of 2014, compared with its $0.23 profit in the year-ago period. Particularly if Tyson decides it needs the egg business to bolster its own chicken business, a higher price tag from a bidding war could further increase the risk to Post.

Acquisitions, particularly large ones, have a poor track record of success for those making the purchase, and Post Holdings risks posting more and bigger losses if it follows through on the deal.

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