4 reasons why buying Twinkies maker Hostess makes sense

Smucker’s jelly-filled Twinkies may someday come to store shelves.

“Never say never,” J.M. Smucker (SJM) CEO Mark Smucker told Yahoo Finance following the announcement that the company plans to acquire Twinkies’ parent company Hostess (TWNK) for $5.6 billion dollars.

According to Smucker, the snack megamerger, which is expected to close in Smucker’s fiscal third quarter, made sense as the company looks to expand its offerings for a different “snacking occasion.”

“[At] different times of day, different people are looking for a sweet snack versus a salty snack versus a protein-based snack,” the CEO said. “This obviously expands us into the sweet sort of ‘reward myself’ … snack.”

The deal comes as Americans are snacking more frequently. According to a survey from Circana, about half of Americans snack three times a day, more than two years ago.

Investors reacted to the news on Monday. J.M. Smucker stock fell over 7% as of afternoon trading, while Hostess stock popped by 18%.

“In our view, the deal is more complementary than most may appreciate, but we understand concern over purchase price and the future growth outlook,” Barclays analyst Andrew Lazar wrote.

But not everyone on Wall Street was eating up the deal, and investors remained cautious given the valuation.

“All in, we can’t say we love this transaction from SJM’s perspective,” JPMorgan analyst Ken Goldman wrote in a note. “We are very surprised that SJM (or anyone) is paying this amount.”

From Hostess’ perspective though, JPMorgan is a fan of the deal. And a note from Stifel said that Hostess Brands would present approximately 20% of Smucker’s overall revenue and provide “another growth vehicle” beyond Uncrustables in its US business.

As Smucker’s looks to round out its portfolio — which includes coffee brands Café Bustelo, Dunkin’, and Folgers as well as pet food brands like Meow Mix, Milk-Bone, and Nutrish — the company’s CEO offered three additional reasons why the deal made sense:

Expanding access to convenience stores and grocery retailers

The acquisition is a two-way street for unlocking distribution channels, Smucker said.

Hostess “opens up better access for us into convenience stores,” Smucker said. “They’ve built a distribution model that both has really great reach but also is profitable.”

The convenience category is something the company is “really pleased” with when it comes to Uncrustables, a brand of crustless frozen sandwiches that is expected to hit $800 million in sales this year and become a billion-dollar business by 2027.

Miami, Florida, convenience store junk food, Hostess cupcakes cookies buns dessert display. (Photo by: Jeffrey Greenberg/Universal Images Group via Getty Images)

Smucker deal would provide the company greater access to convenience stores. Hostess cupcakes and other dessert are displayed at a convenience stores in Miami. (Photo by: Jeffrey Greenberg/Universal Images Group via Getty Images)

Goldman noted that Uncrustables are “produced, delivered, and merchandised on shelves differently than Twinkies” and that Smuckers makes an odd buyer for Hostess given it “sells very few shelf-stable snacks today.”

But the Smucker CEO suggested that may be changing.

Smucker’s now has “a formula” for Uncrustables that can stay thawed out for five days and still be fresh, meaning the company can sell the sandwiches alongside Hostess products in more locations without refrigeration.

Meanwhile, Hostess will now get access to J.M. Smucker’s “very strong” presence in grocery retailers. Smucker said the company will “continue to expand their presence and some of their partnerships.”

Bite-sized Uncrustables?

The strawberry jelly maker plans to jumpstart growth with more innovation.

“Both companies have really solid innovation capabilities and product development, but I think we can learn from each other on how to innovate better,” Smucker said.

He added that the company gets requests all the time for new products, such as bite-sized Uncrustables. With this acquisition, that may be in the future.

“Offering the consumers different sizes and smaller products, lower calories, whatever it might be, has been one of the ways that [Hostess has] innovated, and we liked that idea,” Smucker said.

Smucker's Uncrustables sandwiches (Courtesy: The J.M. Smucker Co.)

Smucker’s Uncrustables sandwiches (Courtesy: The J.M. Smucker Co.)

Amplifying the Hostess brand through marketing

J.M. Smucker also plans to get more ads for doughnuts and cupcakes in front of consumers.

“They don’t invest a lot in consumer marketing, and we do,” Smucker said. “We think there’s an opportunity to continue to amplify the Hostess brand with consumers through marketing and advertising.”

It is worth noting, per CFO Tucker Marshall, that there are no plans to let go of any staff or close any production facilities.

“We’re focused on ensuring that we continue to demonstrate the growth of the Hostess portfolio and so we’ll get in and learn things and evaluate, but we don’t have any [layoff] plans at this time.”

Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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