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The company issued the release following a report in the The New York Times that the South Burlington, Vermont company's board of directors has approved a deal worth $260 million, or $38 per share.
The discussions have reportedly strained relations between co-founders Jerry Greenfield and Ben Cohen because Greenfield objects to rival Unilever's involvement, The Times reported.
Shares of Ben & Jerry's churned up $4 1/2 to $34 1/2 in early trading on speculation of the deal. (The spread between $38 and $34 1/2, by the way, represents the market's doubt the deal will close.) In fact, over the last four months Ben & Jerry's shares grabbed more attention than the pets.com (Nasdaq: IPET) sock puppet as takeover speculation drove the stock higher.
That's a switch for Ben & Jerry's investors. Let's say you bought 100 shares of Ben & Jerry's in 1986 at a split adjusted price of $6 3/4 and held it until the end of last year. Your capital gains stood at $3,625 as of December 31, which represents a 10.5% annual return. In other words, you underperformed the market's historical average during the greatest bull run in stock market history, while assuming much greater risk. That's unacceptable any way you slice it.
Over the last three years, net income is down about 13% from 1997 to $3.38 million. Much worse, the company's return on total capital stands at an abysmal 3% for the year (it was only 4% two years ago), which means there's little chance the company is creating real value for its shareholders. It's paying about 5.8% interest on its debt alone. It may be making really good ice cream, but it's not rewarding investors.
In fairness, it's been a tough environment for brand name consumer products manufacturers, but for a company with a great brand name, about a 45% share of the super premium ice cream market, successful new products, and growing opportunities overseas, the returns should be better.
Shareholders should burn this example into their minds -- companies with great brands and products aren't necessarily great investments. It takes a lot more to build a business that creates enduring value.
Lately there are signs Ben & Jerry's results are improving. It's making better use of its manufacturing facilities, which are operating more efficiently now that volumes have increased. It's outsourcing manufacturing of its frozen novelties products to a third party vendor in an effort to boost margins and introduce a wider range of products. And last year Ben & Jerry's was able to pass on an impressive 3.3% increase to its distributors. That's pretty good in an industry where consumer products companies lack pricing power because of consolidation in the retail sector. Of course, most of Ben & Jerry's sales come from convenience stores, where similar consolidation hasn't occurred.
Nevertheless, the company's future is uncertain as competition heats up. In 1998, Ben & Jerry's ended its long-standing distribution agreement with ice cream company Dreyer's (Nasdaq: DRYR), leaving Dreyer's free to compete against Ben & Jerry's in the super premium segment. It's unclear how this will play out.
Of course, Unilever's involvement in the buy out may not improve things since the company, which owns Breyer's, lacks a U.S. distribution channel. It does, however, have deep pockets, which could be used to give Ben & Jerry's a boost in its direct-sales efforts.
Overall, a $38 a share offer is a nice premium on subpar performance. It may not be a fairy-tale ending for an outfit that gives 7.5% of its pretax profits to charity, but it's more than double the level shares traded at before takeover speculation began. Besides, the company will be able to continue its charitable efforts as a private company, according to the Times story.
One last point. Ben & Jerry's hasn't been footing the bill for its 7.5% charitable efforts for a long time -- its shareholders have helped. Even though its donations are commendable, the program lost its luster when the company failed to deliver reasonable returns to its long-term investors.
It was time for the company to make a move.
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