Jams withOrThe Best Part of Wakin’ up Has Got to be GoodFI561 Term ProjectChrista MidcapDecember 17, 2009
Executive SummaryThe 2008 acquisition of the Folgers Coffee Company by the J.M. Smucker Company was applauded when announced as it seemed a positive move for all involved. The synergies and efficiencies created in this conglomerate merger provide higher margins and profits for Smucker’s and also positive value for Folgers. Smucker’s has added value to their firm by acquiring the top coffee maker at a positive net present value of $1.5 billion. Smucker’s is well on its way to achieving dominance in grocery stores’ center aisles.The PlayersThe J.M. Smucker Company (SJM) has grown its Ohio-based fruit spread business over the last hundred years into a top selling nationally known brand. More recently, the company has grown very quickly as a result of food industry acquisitions that have served to fulfill the company’s strategy to own and market number one brands within respective categories. By doing so, Smucker’s has steadily gained market share among food producers. In the years from 2002-2005 which included some of their largest acquisitions, Smucker’s grew from a $1 billion company to an $8 billion dollar company with plants and operations across the United States and Canada.The Folgers Coffee Company was established over 150 years ago in San Francisco and has become the number one selling retailcoffee brand by sales and volume. While part of the Procter & Gamble Company, Folgers’ market share grew to nearly 40% of the packaged coffee market, but had begun to experience dragging sales due to the growing popularity of the foodservice coffee shops.
The GoalSmucker’s goal in acquiring Folgers is part of their long term strategy to promote balanced growth of the company through increases in market share. The company executes this strategy by buying companies they have strong synergies with and can create efficiencies. The results have been sales growth, operating efficiencies and the repurchase of shares which increases value of the firm. In the area of sales growth, Smucker’s successfully increases sales by marketing, cross-brand promotions and introducing new products.Smucker’s expects total savings from synergies with Folgers to total $80 million. Savings will come from the areas of administration, supply chain, warehouse and distribution costs. Smucker’s and Folgers have the same marketing demographic, people who prepare meals at home. Also, the sale and distribution of Folgers is aligned with Smucker’s current sales model. Smucker’s anticipates more innovation capabilities in formulation, processes, and packaging. The financial impact of the acquisition will result in growing operating profit and EBITDA margins and an increase in free cash flow. Folgers is a $1 billion company. The addition of their high volume of sales will produce a nearly 50% increase in
revenue. Together with the predicted savings from COGS and SG&A of 4%, Smucker’s hopes for an increase of 8 percentage points of operating profit margin. Smucker’s will also be able to focus more attention on Folgers and make the changes needed to boost growth for the coffee maker.The DealIn the summer of 2008 Smucker’s proposed to buy the Folgers Coffee Company from Procter & Gamble, who had been looking to split off the popular coffee maker due to sluggish growth prospects. By year end, Smucker’s came to an agreement with P&G to acquire Folgers for a total of approximately $3.3 billion. The company offered P&G shareholders about 1.6 shares of SJM for their P&G shares. Smucker’s issued roughly 63 million shares and P&G shareholders owned 53.5% of the new company. To increase value to their own shareholder’s Smucker’s agreed to pay a special onetime cash dividend of $5 per share to existing shareholders indicating the strength of the combined businesses. In addition to the tax free share exchange and special dividend, Smucker’s agreed to take on $350 million in Folgers debt. The New CompanySmucker’s with the addition of Folgers aims to be a low cost provider that is also looking to differentiate itself in the market. They will achieve this through anefficient distribution and better access to capital and buyers. What differentiates them are their strong brands with a loyal customer base.High volume drives this new company as they seek to add top selling, familiar brands with a large presence in their respective markets. Cost and price are also very important as Smucker’s strives for efficiencies and looks to improve the quality or the perception of improved quality in all its brands in order to change