Whole Earth Brands–Buy One Get One Free

Disclosure: I own this stock.

This might likely be a fleeting opportunity, so this write up will be brief because the Company (NASDAQ: FREE) has a very detailed investor presentation.

Tl; dr

So, two businesses combined into one company. At the current price, we are paying for one business and getting the other for free.

Why does this opportunity exist?

Currently, the stock is trading at $7.6, down from the pre-acquisition circa $10 price level. I think there are several non-fundamental reasons for the sharp decline since June 25th, the official date of the business combination and of the stock ticker conversion (used to trade under ACTT):

  • Existing shareholders of ACTT could not trade when NASDAQ convert the symbol to FREE, which caused them to panic sell
  • Terrible new ticker “FREE” (you can give it a try to search this stock on Google using this symbol); so, many potential buyers are deterred from this investment because it’s hard to find
  • Terrible shareholder communication: seems like they were being lazy because the IR site is buried in the existing “Whole Earth Sweetner” website–this is getting resolved by Google as the search engine optimizes the search result, so now, if you search “Whole Earth Brands”, you will see the IR site as the first result
  • Lack of financial statements: the official pro forma statements on EDGAR are still scenario-based; the investor presentation only has non-GAAP statements and is missing Balance Sheets and Cash Flow statements
  • Being a SPAC-turned post-merger stock is very vulnerable to short attacks; due to a lack of retail investing interest, it’s hard to combat the short sellers

These problems will be solved very soon as the public continues to absorb the event.

As for short sellers, seems like the % of Vol Shorted is paring down.

Source: Naked Short Report

However, the selloff creates a fleeting and compelling investment opportunity for us.

A Compelling Investment Opportunity

Whole Earth Brands is created by Act II Global Acquisition Corp’s business combination of Mafco and Merisant.

Investor’s Presentation

In short, both companies are quality businesses with market leading positions in an industry that has inevitable tailwinds. They have long-term relationships with blue-chip companies like Altria, Costco, Aldi, CVS, etc. and a rock-star management team.

Given these reasons, I believe using median comp multiples for both businesses is a reasonable approach to value the Company.


In 2019, Merisant did a $10.4m EBIT and Mafco a $19.4m EBIT. The management expects a PF Adj. EBITDA of $65m in 2020, which is a growth of 3.8% from 2019. Let’s just assume the PF EBIT grows at the same rate, that would give us $30.9m for 2020 PF EBIT (Merisant $10.82m, and Mafco $20.09m).

CPG comp universe has a median forward EV/EBIT of 14.2x, and 14.7x for F&I companies. Merisant contributes to 35% of the PF EBIT, Mafco 65%. So, the weighted average forward EV/EBIT applicable to FREE is 14.52x.

Assuming a net debt of 44m, and a shares outstanding of 39m, the stock should worth $10.38, which is a 37% upside. Separately, using the above multiples, Merisant is worth $3.94 a share, and Mafco $7.57, before debt. So, we are basically getting Merisant for free at the current price.


Note that for conservative reasons, I did not value the company using the PF Adj. EBITDA. If we do use that, however, we can see the stock worth $15-$18, given the comp median forward EV/EBITDA is 12.1x for CPG and 9.2x for F&I.

Inversely, using a blend forward EV/EBIT of 14.52x, the current price is suggesting an EV of $341m, or a PF EBIT of $23.5m, or a decrease of 21% from 2019. I think this is unlikely given the Company has experienced the largest hit in 1Q, with YoY PF Adj. EBITDA declined 13% to $14.4m; not to mention that things got better in April (see presentation page 37). Even just use the run-rate PF Adj. EBITDA of $57.6m, the stock is worth $14.

Alternatively, the current price suggests an EV/2019-reported-EBITDA of 8x. Or, a 5.2x forward EV/PF Adj. EBITDA. No matter how you look at it, it’s trading well below the comp.

Catalyst

People can finally find this stock on Google

Rising awareness of the stock

Short sellers quit

Appendix

Source: Investor Presentation; Cantor Fitzgerald
Source: Investor Presentation; formatted by Cantor Fitzgerald
Source: Bloomberg Data; Cantor Fitzgerald

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