2023-07-23 04:33:16 ET
Summary
- Lifeway Foods is a quite rare instance of a family drama ongoing in a publicly-listed company.
- The feud between the mother/son and the daughter regarding the company sale has been dragging on for several years now, with no outcome so far.
- Could this time be different?
- What could Lifeway Foods be worth to a potential acquirer?
This is a potentially interesting situation unfolding in the probiotic drink industry. Not often can one observe founding family members publicly clashing over the direction of the business. The ongoing family feud might very well continue dragging on. However, several recent developments, including the company's hiring of a financial advisor and pushback from an activist investor, make this situation worth tracking.
Family Feud
Lifeway Foods ( LWAY ) is a $90m market cap kefir producer in the US. The company holds a dominant position in the US kefir market, with an estimated 78% market share as of 2019. LWAY’s largest shareholder is the world’s largest yoghurt maker Danone with a 24% stake. The company was founded in 1986 by Michael Smolyansky. Since Michael’s death in 2002, the company has been steered by his daughter Julie (currently owns 17%) who has since been the CEO while son Edward (18%) and his mother Liudmila (13%) remained at the company board until recently.
The feud goes back to Oct’21 when the Edward and Liudmila decided to nominate their directors to the board, however, the company failed to include the mother and son’s nominees to the shareholder meeting. In early 2022, Edward and Liudmila began pushing for the replacement of the CEO Julie and the launch of strategic alternatives. Both sides reached a settlement agreement in Jul’22 whereby LWAY agreed to announce strategic alternatives. With no updates from the company on the strategic review progress and no hiring of a financial advisor, earlier this year Edward and Liudmila claimed the company has breached the settlement agreement. Shortly after, the mother and the son announced plans to nominate their appointees to LWAY’s board. The recent shareholder meeting passed with the equity holders supporting the incumbent management team led by Julie. In May’23, Liudmila resigned from LWAY’s board.
What Has Happened Recently?
The events described above could indicate that the strategic review might continue dragging on with no outcome. Having said that, there are several other interesting recent developments/aspects worth highlighting. Most notably, in mid-June LWAY announced it has hired the financial advisor Kroll Securities to support the ongoing evaluation of strategic alternatives. The announcement’s PR (see quote below) indicates that the company has been “considering potential options” before deciding to hire the financial advisor.
Over the course of the past several months we have been considering potential options, and the hiring of Kroll represents the next step in this process. We will provide further updates as appropriate.
I think this announcement and its timing are particularly interesting. This is the first time LWAY has hired a financial advisor for the strategic review process. Moreover, the announcement came shortly after the incumbent board has already been elected (in the same PR as the shareholder meeting results announcement). The hiring of the financial advisor right after the shareholder vote is puzzling and I struggle to reconcile it with LWAY’s management apparent unwillingness to sell the business. I think this indicates that the move was not made simply to fend off Edward and Liudmila, resolving their concerns related to the breach of the settlement agreement. Instead - and this is my speculation - the engagement of Kroll Securities could mean that Julie might have either received some inbound inquiries from potential acquirers or that the CEO/large shareholder might be opening up to a potential company sale. While Julie Smolyansky is compensated handsomely ($2.8m in total compensation in 2021 and 2022), the CEO would pocket a sizable payout of $16m in a company sale scenario from selling her existing ownership stake, with an additional $2.9m coming from stock options/awards that would west upon a change in control.
Another interesting aspect is that shortly before the shareholder meeting, activist investor Kanen Wealth Management (owns 4%) came out , pushing for a company sale. Kanen has suggested that LWAY might be worth $15-$20/share in sale scenario which is 100%+ above current share price levels. The activist has claimed that the incumbent management has mis-managed the business and has failed to form a strategic committee to consider a potential transaction. Pushback from Kanen is the first time LWAY has been pressured by outside activists. There is a non-zero chance that the recent hiring of the financial advisor was also partially due to the pressure from the activist. Kanen is a hedge fund with c. $300m in AUM. The firm has previously had some activist success, most notably at Goedeker’s (two board members appointed by Kanen) and Magicjack (settlement with the company leading to Magicjack eventually getting acquired).
Danone
Danone has held its stake in LWAY since 1999 as part of the companies’ non-compete agreement and has had a right to designate one director nominee. There is a chance of Danone coming out with a bid to acquire LWAY. Danone has been a fairly active acquirer in the dairy/dairy-free substitute product space, including acquisitions of WhiteWave (2016, $10bn), Fan Milk (2013, $300m) and Follow Your Heart (2021). During a recent conference call, Danone’s management stated that the company will continue to actively look into bolt-on acquisitions. Potential acquisition of LWAY would be a tiny strategic acquisition allowing Danone to gain a dominant foothold in the US kefir market. Given that LWAY is currently limited to the US market and considering Danone’s vast distribution network, the potential acquirer could grow the business rapidly. Given these points, I find it somewhat puzzling that Danone has not yet tried to acquire LWAY.
What Does LWAY Do?
Lifeway produces and markets dairy products in the US. The company’s primary product is kefir (78% of sales in 2022) which is a fermented milk drink similar to a yoghurt. LWAY is the ninth largest yogurt manufacturer in the US by sales. LWAY’s products are sold through the major retailers, including Whole Foods, Walmart and Costco, as well as distributors such as United Natural Foods. The company’s main production input is milk whose minimum price is set by the federal government.
Under Julie’s leadership since 2002, the company has been rapidly expanding its topline, with a 13% CAGR sales growth in 2002-2022 driven by increasing penetration as well as introduction of new products. Over the last decade, LWAY has almost consistently been profitable on operating/net income level with the exception of 2017-2019 when revenues fell due to a broader decline in dairy and cultured dairy product categories sales.
More recently, in 2022 the company’s profit margins have been negatively impacted by inflationary pressures on the cost side (primarily milk), with EBITDA margins declining from 7% in 2021 to 4% in 2022. However, the management has hinted that some of the costs (e.g. milk and transportation) have already began to normalize. Additional boost to margins is expected to come from productivity optimization measures such as implementation of promotional software and marketing/operational tools.
Valuation
LWAY currently trades at 11.6x TTM EBITDA and 0.6x TTM revenues. The activist Kanen’s share price target of $15-$20/share relies on 1.5x-2x EV/revenue multiples. Valuation of the company is not straightforward given that it does not have direct competitors producing primarily kefir and instead competes with producers of other dairy products, such as spoonable and drinkable yoghurt and non-dairy probiotic products. Having said that, there are a couple of reference points:
- Danone’s acquisition of WhiteWave in 2016 valued the target at $12.5bn or 22x TTM adjusted EBITDA. The company produces organic butter, soy and almond milk, among other products. Prior to the acquisition, WhiteWave had compounded its topline at a 8-15% pace in 2012-2016 - comparable to LWAY (0-22% and 17-19% in 2021-2022). However, WhiteWave’s EBITDA margins stood at 14% in 2015-2016 - higher than 6-7% for LWAY at the time and 4-7% more recently in 2021-2022.
- Organic snack producer Hain Celestial ( HAIN ) is currently valued at 13.6x TTM adjusted EBITDA ex-SBC. While the peer has been profitable in recent years, its topline has been in a steady decline since 2016. However, HAIN’s EBITDA margins stood at 9-12% in 2021-2022.
- LWAY’s current valuation multiple is below where the company acquired two of its smaller rivals - kefir producer Fresh Made (2009, 1.4x TTM sales) and probiotic drinkable yogurt firm Glen Oaks (2021, 0.8x).
Takeaway
Recent developments, including the hiring of a financial advisor and pushback from the activist Kanen, are curious and might indicate that the management has changed its mind regarding a potential company sale. The activist’s valuation targets would imply a substantial upside from current share price levels. Having said that, a lack of directly comparable publicly-listed peers and industry transactions does not allow to sense-check the activist’s estimates. Moreover, I think there is still a clear risk of the incumbent management deciding not to sell the company and continuing to steer it as a standalone entity. Given these arguments, I am putting LWAY on my watchlist until further developments.
For further details see:
Lifeway Foods: Family Drama Coming To An End?