Did Annie's Just Become a Takeover Target?

A powerful parent could solve some of the company's problems, and the stock is getting cheap.

Jun 10, 2014 at 10:24AM

Despite my best efforts to warn investors about Annie's (NYSE:BNNY) cost difficulties as well as the huge red flag of accounting troubles yesterday, Annie's stock closed Monday almost 8% higher. With no new news out of the company, why would investors erase a good chunk of the stock's recent losses?

A white knight?
The first reason might simply be random chance. Like the dead cat after which the term "dead cat bounce" is named, any stock that falls fast enough is bound to have a small bounce before it hits the ground again. As of Friday, Annie's was down nearly 20% in just a week, and over 40% since its high last October. Monday's bounce could just be investors seeing the price fall and blindly buying shares without seeing the signs of trouble.

More likely, it has to do with the rumors, stoked by the likes of Credit Suisse and JPMorgan Chase, that Annie's would make a good acquisition target. On the recent conference call, Annie's CEO responded to a question about the possibility of a takeover, saying, "We're going to continue to try to grow the company independently, focused on our mission and values. But as I said, we also have to do the right thing for shareholders." So, there's no official reason to expect a buyout, but Annie's isn't ruling it out, either.

A takeover might make sense. Since its IPO two years ago, the company's enterprise value has fallen by a quarter, while EBITDA is up 64%, giving it an EV/EBITDA ratio of just 16.70, fairly low for a growth stock. As noted, one of the main difficulties facing Annie's is the rising cost of wheat, but if the company had a powerful parent like Kraft, whose revenues are a hundred times higher than Annie's, it might be able to negotiate better prices for its input costs, while giving that parent the benefit of a fast-growing brand.

The expertise of a large conglomerate might also be able to help with its accounting troubles, but for now, it might also discourage any potential buyers, at least until the company's financial picture is clearer. Until then, the stock may resume its decline, presenting a potential buyer with a better opportunity.

The Foolish bottom line
Ultimately, a buyout seems possible, and it would be a quick win for anyone buying the stock at these depressed levels, assuming they don't get much worse before they get better. But it would certainly be a raw deal for anyone who bought a few months ago, or even long-term investors buying the stock now, hoping to stay with the stock as it grows, develops new products, and rewards patient investors.

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Jacob Roche has no position in any stocks mentioned. The Motley Fool owns shares of Annie's and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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