BREAKINGVIEWS-Hot dogs show how M&A sausage gets made today

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jonathan Guilford

NEW YORK, Jan 21 (Reuters Breakingviews) - New York City's gluttony extends far and wide. This is most atavistically on display beyond the gleaming Manhattan skyscrapers on Brooklyn's Coney Island boardwalk, where Nathan's Famous NATH.O hosts a renowned hot dog-eating contest every July 4. As pork producer Smithfield devours the frankfurter slinger, the Big Apple's insatiable dealmakers are helping indulge intensifying hunger for acquisitions.

Nathan’s, which opened its first wiener stand in 1916, agreed to be bought for $450 million, including debt. Backed by China’s WH Group, Smithfield SFD.O already holds the exclusive license to churn out Nathan's in the United States and Canada. Related royalties account for about a fifth of Nathan's revenue.

Smithfield is paying more than 12 times EBITDA for the last year, an implicit premium to the valuation Kraft Heinz sought when it shopped rival hot dogger Oscar Mayer in 2024. Nathan's is a far smaller business, but it found a buyer and Oscar Mayer did not.

With $9 million of promised cost savings from the transaction, the deal implies a modest 8% return on Smithfield's investment, assuming Nathan's operating profit holds steady, Breakingviews calculates. Whether shareholder Mario Gabelli, whose funds hold 11% of Nathan's according to LSEG data, relishes the offer is a different matter.

Nathan's steamed past the S&P 500 Index .SPX last year, boosting the case for a bigger payday. Although revenue is growing at a healthy 8% rate, profit declined as costs increased faster. Its EBITDA margin, stripping out various one-time items, slipped to 22% from 25% last year and 30% pre-pandemic. Spot beef prices, after years of being flat, are up 84% since 2020, per LSEG.

The seller, under longtime CEO Eric Gatoff, also has been abundantly seasoning its stock. It paid a 2015 mega-dividend equivalent to 35% of Nathan's market value and has been inhaling shares, via buybacks, faster than competitive eater Joey Chestnut swallows the company's weenies every summer.

Such toppings will be harder to apply now and weaken the case for independence. Many smaller enterprises, from airlines to chipmakers, increasingly face the same fate, as larger peers seek to capitalize on smoking acquisition conditions that render even less-savory takeover targets more appetizing. How fitting that a hot dog vendor would show how today's M&A sausage is made.

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CONTEXT NEWS

Smithfield Foods, a pork producer backed by China’s WH Group, said on January 21 that it had agreed to buy hot-dog maker Nathan’s Famous, for $450 million, including net debt.

Under the terms of the deal, Smithfield will pay $102 a share in cash, a 10% premium to its closing price on January 20. Smithfield said it expects to generate $9 million of annual cost savings by the second anniversary of the transaction closing.

Goldman Sachs is advising Smithfield and Jefferies is advising Nathan's Famous.

(Editing by Jeffrey Goldfarb; Production by Pranav Kiran and Maya Nandhini)

((For previous columns by the author, Reuters customers can click on GUILFORD/ Jonathan.Guilford@thomsonreuters.com))