Whole Earth Brands (FREE)

[Golden Cross]

A Potential 100% Upside

Link:
https://seekingalpha.com/article/4355665-act-ii-global-acquisition-potential-100-upside?utm_source=otcmarkets&utm_medium=referral

Act II Global Acquisition is a blank check company led by the founder of Hain Celestial Company.

It has a plan to merge with Merisant and MAFCO Worldwide to create Whole Earth Brands at a relatively low valuation.

The combined company's share price might be worth $18.60 per share, while its warrant could have 100% upside potential.

Act II Global Acquisition Corporation (NASDAQ:ACTT) has been quite volatile in the past few weeks. Since June 2020, its share price has fluctuated between $10.10 and $11.22, and its warrants have stayed in the range of $1-2.5. The upcoming acquisition of Merisant Company and MAFCO Worldwide, which would become Whole Earth Brands, would give Act II a lot of potential upside.

Strong management team
One of the most critical success factors for SPACs (special purpose acquisition companies) is their management team. What we like about Act II is its strong management team with outstanding business records. Irwin D. Simon, the executive chairman of Act II, has more than 30 years of global business experience. He was the founder of The Hain Celestial Group (NASDAQ:HAIN), the leading company in natural and organic food, beverage, and personal care products. Irwin Simon has run Hain Celestial for more than 25 years, growing the company to $3 billion in net revenue by 2018. He is also currently the chairman and CEO of Aphria (APHA), one of the largest global cannabis companies in the world. However, he does not own any shares in the SPACs. John Carroll, Act II's CEO, also has tremendous experience with food business globally. John has spent 14 years with Hain Celestial in various positions and departments, including groceries, snacks, personal care, and seasonings. Previously, he was with Heinz Frozen Foods, The Hershey Company (NYSE:HSY), and Church & Dwight (NYSE:CHD). John Carrol owns 100% of 7.5 million class B shares of Act II.

Relatively undervalued merger multiple
Act II has entered into an agreement to acquire Merisant and MAFCO Worldwide to create Whole Earth Brands, a global platform of branded products and ingredients for consumers. Merisant, the new company’s Branded Consumer Packaging Goods (Branded CPG) segment is considered the global supplier of sugar substitutes and natural sweeteners with several leading brands, including Equal and Canderel, Whole Earth and PureVia. Canderel and Equal are the two most famous brands, with brand awareness levels of 81-95% in the U.S., U.K., France, Australia, and South Africa.


Source: Whole Earth Brands presentation

In 2019, the Branded CPG generated nearly $166 million in net sales. In the first quarter, its sales dropped by 3.2% year-over-year, from $41.5 million to $40.2 million, due to COVID-19’s negative impact. However, in April, sales have picked up substantially, up 21% year over year from $12.8 million in April 2019 to $15.5 million in April 2020.

On the other hand, MAFCO, the Flavors & Ingredients segment of the new company, has a strong global position in natural licorice extract and licorice derivative products. What we like about the business is the long-term relationship of more than a decade with its big customers, including Altria (NYSE:MO), Hershey, Mondelez International (NASDAQ:MDLZ), and Haribo. Several of its top 10 customers have been buying its licorice products for more than half a century. The Flavors & Ingredients segment has been down a lot, due to the declining sales in International Tobacco. Its net revenue has decreased by 10.4% in the first quarter and 7.5% in April. Without International Tobacco’s negative sales impact, its revenue should have grown by 0.9% in the first quarter and 14.3% in April.

The Flavors & Ingredients segment is more profitable, with its EBIT margin three times as high as the Branded CPG segment’s EBIT margin. However, Branded CPG seems to be more efficient over time, growing EBIT from negative $3.8 million in 2017 to $10.4 million in 2019.

Source: Author’s table & Whole Earth Brands presentation

By 2020, Whole Earth Brands (the combined company) is expected to generate $270 million-$290 million in revenue, representing a low- to mid-single-digit sales growth. Its expected EBITDA is estimated to be between $63 million and $67 million, with margins staying the range of 23-25%.

The merger between Act II and Merisant and MAFCO would result in an enterprise value of $439 for the company, including $390 million in equity value and $49 million in net debt. If we assume the 2020 adjusted EBITDA would reach $65 million, the deal values the combined company (Whole Earth Brands) at roughly 6.75x EBITDA. Compared to other companies including McCormick (NYSE:MKC) and Post Holdings (NYSE:POST), Whole Earth Brands seems to be quite cheap.



Source: Whole Earth Brands presentation

A potential 81-100% upside
If Whole Foods Brands were valued at the median enterprise value multiple of 11.9x, it should be worth $773.5 million. With pro forma shares outstanding of 39 million and net debt of $49 million, Act II's share price should be worth $18.6 per share after the merger, 81% upside from the current trading price.

Investors might consider investing in the warrants. Act II is proposing to adjust the warrant terms as follows:

Proposal No. 1 - The Warrant Amendment Proposal - To consider and vote upon an amendment (the “Warrant Amendment”) to the warrant agreement that governs all of Act II’s outstanding warrants to provide that, immediately prior to the consummation of the Business Combination (as defined in the accompanying proxy statement/prospectus), (i) each of Act II’s outstanding warrants, which currently entitle the holder thereof to purchase one Act II Class A Share at an exercise price of $11.50 per share, will become exercisable for one-half of one share at an exercise price of $5.75 per one-half share ($11.50 per whole share), and (ii) each holder of a warrant will receive, for each such warrant, a cash payment of $0.75 (although the holders of the private placement warrants have waived their rights to receive such payment) (the “Warrant Amendment Proposal”)

If this warrant amendment is approved, each warrant will receive $0.75 in cash payment, but warrant holders would need two warrants to exercise the right to buy one share.

$

One share value

18

Half share value

9

Exercise price

5.75

One warrant value

3.25

Cash payment

0.75

One warrant worth

4

Source: Author’s table

Act II could redeem the warrants when the common share is trading at least $18 for 20 out of 30 trading days. If the common share is trading at $18 per share, each warrant would be worth roughly $4, 100% from the current trading price at $2.