Wouldn't it be something if the above title contained a typo? Now that would be a story: "$450 million florist buys $52 billion mortgage market-maker." If only.
This story is actually quite a bit smaller in scale. Fannie Mae (NYSE:FNM) remains independent -- it's Fannie May, with a "y," that's getting bought out. Now, in contrast to Fannie May-with-an-e, Fanny May-with-a-y is a private company, so there's not a whole lot of publicly available details about its finances. But we'll tell you what we can glean from 1-800-Flowers' (NASDAQ:FLWS) press release.
To wit: Fannie May Confections Brands is an 86-year-old chocolatier based in Chicago. It's trending toward $75 million in sales for this fiscal year, which ends April 30. So with 1-800-Flowers anteing up $85 million for the business, Fannie May is being valued at roughly 1.1 times sales.
Which is interesting, because .
In addition to the homonyms and wordplay afoot, it looks like an awfully high multiple that 1-800-Flowers is offering. While "1.1 times sales" may not sound like much, it's nearly twice the multiple (0.6 times) that 1-800-Flowers' own shares currently fetch.
Which begs the question: is 1-800-Flowers overpaying? And the answer: I don't know. Like I said, the multiple looks rich. But you've got to wonder whether 1-800-Flowers execs perhaps see something in Fanny May that we outside shareholders can't, given the limited numbers visible to us.
This is a common problem for investors trying to interpret press releases -- especially those regarding small-scale acquisitions of privately owned companies: They often don't give a lot of detail about the economics of the business being acquired. Although 1-800-Flowers' press release described Fanny May's approximate annual sales, it didn't tell us how profitable those sales were or how fast they were growing. Nor did it describe whether Fanny May brings any cash -- or debt -- along with it.
After doing a little research, however, I'm inclined to think the deal may not be as expensive as it first appears. The reason: It turns out that Fanny May is much more profitable than 1-800-Flowers. On each $1 of sales it makes, 1-800-Flowers grosses 41.5 cents in profits, versus 45 cents for Fanny May. Further down the income statement, the disparity grows. 1-800-Flowers earns 3.2 cents in profit before interest, taxes, depreciation, and amortization (EBITDA). Fanny May earns about 16 cents.
Is it worth paying twice 1-800-Flowers' P/S ratio to lay claim to five times its profits? I think yes.
Read more flowery and Foolish prose in:
- Foolish Forecast: 1-800-Flowers in Season
- 1-800-Flowers Ready to Bloom
- Budding Growth at 1-800-Flowers?
Fannie Mae-with-an-e is a Motley Fool Inside Value selection.
Fool contributor Rich Smith does not own shares of any company named above.
