Lifeway Drinks Up Another Rival

If you can't beat 'em, buy 'em. Actually, come to think of it, even if you can beat them, if the price is right, you might as well buy them anyway.

That seems to be the thinking at Lifeway Foods (NASDAQ:LWAY), the little Illinois maker of a delicious, yoghurt-like beverage known as kefir (pronounced "KEEF-er," like the star of 24, Kiefer Sutherland). In a replay of a gambit first implemented in 2006, Lifeway announced yesterday that it's buying its biggest rival in the kefir market, Pennsylvania's privately held Fresh Made Foods.

Now at first glance, the deal may not look propitious for Lifeway shareholders. The company will shell out $14.05 million for its new prize, including an up-front payment of $10 million. The problem is, Lifeway doesn't actually have $10 million. In fact, based on its most recent financials, Lifeway taps out at $6.2 million in cash and short-term marketable securities, and carries $3.2 million in long-term debt. Buying Fresh Made will, therefore, put Lifeway even deeper in hock.

But that doesn't mean it's a bad deal. For one thing, Lifeway generates plenty of free cash flow to finance the deal. Secondly, think back to when Lifeway made its last big acquisition: the 2006 purchase of then-archrival Helios. Then, it paid $8 million to acquire $5 million worth of Helios' annual sales, a 1.6 multiple. In contrast, it's paying a 1.4 multiple this time to acquire Fresh Made's $10 million in annual sales.

Let's compare cows to cows
Now I know what you're thinking: Even a 1.4 sales multiple is a pretty steep price to pay, right? I mean, other players that dabble in the dairy space sell for way less than that. Kraft (NYSE:KFT) shares fetch a multiple of just 0.9, and General Mills (NYSE:GIS) commands a multiple of 1.3.

But here's the thing: Neither of these giants is growing anywhere near as fast as the kefir market in general, or Lifeway in particular. Between new sales expansions with retail partners Costco (NASDAQ:COST), Wal-Mart (NYSE:WMT), and Target (NYSE:TGT), Wall Street expects Lifeway to grow its profits at nearly 25% per year over the next five years, meaning Lifeway's growth trajectory has more in common with fast-growing Hansen Natural (NASDAQ:HANS) than with traditional dairy-products rivals.

Foolish takeaway
Which brings me to my final point. Hansen shares boast a 3.2 sales multiple for their growth prospects. Faster-growing Lifeway sells for a 3.3 sales multiple -- and now it's about to jack up those sales by taking on Fresh Made's revenue.

So what's my take on the deal? Mm, mm, good.

Want to know more about Lifeway or kefir? Read about both in:

• I Love Lifeway Foods
• Small Cap, Big Potential
• Fool on Call: Lifeway's Corporate Cotillion

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