Special-purpose acquisition companies (SPACs) have grown more popular over the past few years, offering investors nothing more than a pile of acquisition cash that it will use to bring a private company public. Many will make mistakes in picking acquisition partners and fail, just like many IPOs themselves.
Forum Merger II (FMCI), however, seems to have already found a compelling merger target with explosive growth, expanding profitability, and a modest valuation. That target? Ittella International, a plant-based food company that's quickly expanding its popular Tattooed Chef brand.
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About Tattooed Chef
Tattooed Chef is a vegan food brand featuring items such as enchilada bowls, cauliflower wings and burgers, smoothie bowls, and much more. It grows its own organic vegetables in Italy and hand-prepares its items to sell at grocers like Walmart and Costco Wholesale. Importantly, its foods are all able to be frozen, offering grocers more flexibility with supply and expiration.
The brand is owned entirely by Ittella International. Upon completion of the merger the combined entity -- Forum Merger II and Ittella International -- will officially change its name to Tattooed Chef and focus solely on Tattooed Chef-branded sales.
Ittella International was able to grow to $32.5 million in sales in its first eight years of existence. Not bad. Since focusing predominately on Tattooed Chef-branded sales and on plant-based foods in 2017, it has enjoyed a supercharged compound annual growth rate of 61.7%, with $222 million in sales estimated next year. That rate comfortably paces 55.4% growth for key competitors like Beyond Meat.
Tattooed Chef's brand clearly drove sales growth for the company as a whole. Furthermore, it shifted the focus from the private-label foods Ittella had been mainly featuring, to selling only items with the branded Tattooed Chef label. In 2018, private-label sales represented 94% of its revenue. Today, that number has fallen to 37%, with branded sales making up 63% of company revenue. Developing and focusing on branded sales comes not just with inherently higher margins, but also with increased brand loyalty.
Growth and profit expanding together
There are no signs that Tattooed Chef's brand momentum is slowing. Currently, the label is in just 7% of Walmart stores. CEO Sarah Galletti expects that number to rise to 50% by year's end, extending the Tattooed Chef brand to thousands of additional stores. . Galletti also sees regional grocery chains as another natural avenue for expansion. Based on the company's early success in Walmart, it's reasonable to think Galletti will find success with smaller chains as well.
What about profitability? In 2018, the company had an EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of 0%. That has quickly grown to 11.6% this year -- partially thanks to a focus on Tattooed Chef-branded sales -- with estimates of 13.9% for next. Beyond Meat is expected to post an EBITDA margin of 10.4% next year, a full 3.5% worse.
With an expected enterprise value (EV) of $482 million, Tattooed Chef will debut on public markets trading at 2.2 times sales versus 13.2 times sales for Beyond Meat. Its forward EV/EBITDA is far lower than Beyond Meat's at 15.6 times versus 126.8 times. Tattooed Chef is an extremely rare case of a company outshining a direct competitor in all three key areas: growth, profitability, and value.
The company is set to complete its merger with Forum Merger II later this year and debut on the public markets. To me, promising financials and a powerful brand help set the stage for long-term growth and shareholder value creation. Bon appetit!
Editor's note: This article has been updated to say that the company is set to complete its merger with Forum Merger II later this year.
