FREE - Laughing Water Capital - Whole Earth Brands: Starting From A Good Place

• Whole Earth Brands currently trades around 6-7x my estimate of normalized FCF, versus packaged food peers at more than 20x.
• Martin Franklin bought ~14% of the equity during the quarter - at Jarden Corp., Franklin compounded capital at 30% a year for 15 years before selling the business.
• A low starting valuation is a prerequisite for compounding, so we are starting from a good place.

The following segment was excerpted from this fund letter .

Whole Earth Brands ( FREE )

Whole Earth, our alternative sweeteners business, currently trades around 6-7x my estimate of normalized FCF, versus packaged food peers at more than 20x. To be fair, the company has somewhat painted themselves into a corner as they have been pitching themselves as an M&A growth story, but after ~doubling revenue over the last 2 years, at present the balance sheet is full, and they do not have the equity cost of capital needed to continue to pursue M&A with equity.

Thus, the revenue growth story is on hold (although their category should grow faster than other packaged foods), which combined with some inflationary pressures has led to shares being punished. From my perspective, a stalled growth story is not great, but it is better than a continued growth story that is based on value destroying dilutive equity transactions: management deserves some credit for being disciplined. Further, debt paydown is a totally reasonable strategy to build equity value. The company is presently rebuilding the balance sheet, which at some point will likely be fire power for future M&A.

Putting the balance sheet aside, perhaps the most notable recent development is Martin Franklin bought ~14% of the equity during the quarter. No one is infallible, but at the very least it is curious to note that the last time Martin Franklin and FREE’s Chairman Irwin Simon worked together it was at Jarden Corporation, where Franklin compounded capital at 30% a year for 15 years before selling the business.

Again, there is no guarantee here that history will rhyme, but a low starting valuation is a prerequisite for that sort of compounding, so we are starting from a good place.

How cheap does a stock have to be to partner with people that have an incredible history of buying and building businesses?

Should we wait for 4x or 5x normalized FCF? Or should we plow ahead at 6-7x and just acknowledge that the road forward will have plenty of speed bumps?

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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