Strauss expands coffee stake as profit hit by recall
22% drop in quarterly gains • Company buys back 25.1% of Strauss Coffee from TPG
Food company Strauss Group reported a 22% drop in quarterly profit on Tuesday, hurt by a recall of its Sabra spreads in the United States, and said it was buying back the rest of its coffee subsidiary.
For 2016 as a whole, Strauss Group posted a net profit of NIS 355m., 14% more than in 2015. Annual revenue rose 4% to NIS 7.9b.
Strauss, which produces snacks, fresh foods and coffee, said it had agreed to buy back a 25.1 percent stake in Strauss Coffee from buyout firm TPG Capital Management, which had been looking to sell, for 257 million euros.
“Strauss Coffee gives us more operational flexibility by being 100 percent owners of the company,” Strauss CEO Gadi Lesin told Reuters, noting the deal was accretive to earnings.
TPG, which bought its stake in 2008 for $293 million, had asked Strauss to float Strauss Coffee but Lesin said there were no plans in the short term to spin it off and take it public.
“With Strauss Coffee as sole owner... management is better positioned to focus on the strategic decisions for the company,” said Barclays analyst Tavy Rosner, who estimated Strauss Coffee’s value at $1 billion.
In addition, Strauss Coffee will redeem options allocated to its managers for €17 m., and options worth €2m. will be redeemed of converted to options of Strauss Group.
Strauss Group says that the transaction creates value and will contribute to profitability, and that it will mean greater strategic, operational and management flexibility.
The earnings of senior members of Strauss Group was also reported: Chairwoman Ofra Strauss was paid NIS 5.87m. in 2016, of which NIS 3.8m. was salary and the remainder bonuses. President and CEO Gadi Lesin was paid NIS 7.8m., of which NIS 4.6m. was not stock based.
In the fourth quarter, Strauss experienced a production malfunction at Sabra, a subsidiary operating in the US, in which Strauss owns 50%, together with Pepsico. Sabra, which makes chilled dips and spreads, especially hummus, has been one of Strauss’s prominent growth engines in recent years. Last November, Sabra announced a voluntary recall of several hummus products in North America due to concern about listeria bacteria found in the company production site in Virginia, although not in the final products. The company added that it was taking a series of measures at the plant to deal with the event, and was acting in coordination with the appropriate authorities in the US. No product actually containing listeria was ever found. Sabra’s revenue dropped 32% to NIS 233m. following the recall, and the company reported a NIS 26m. operating loss, compared with a NIS 57m. operating profit in the corresponding quarter in 2015. The trend was also evident in Sabra’s result for the entire year of 2016, with sales sinking 7% to NIS 1.3b., together with a 37% dive in operating profit to NIS 113m.
With 14,830 employees, food and beverages manufacturer and marketer Strauss is Israel’s second largest company. Strauss’s share of the local food and beverages market is 11.5%. The company also has important activity in 20 other countries around the world, with an emphasis on coffee, which accounts for nearly 50% of the company’s revenue. Strauss is one of the top 10 companies in the world in market share in this category.
Commenting on last year’s Sabra affair, Poalim IBI Underwriting and Investments Ltd. writes, “The damage is substantial, but we believe that it will be moderated with the passage of time, and expect to see some recovery already in 2017.” Poalim IBI also mentions that in the fourth quarter of 2015, Strauss received a NIS 5m. insurance reimbursement for a different recall event involving Sabra. The Excellence brokerage firm believes that Strauss’s weak quarterly results were caused by Sabra, and predicts “a slight improvement in the company’s results” in 2017 “resulting from an improvement in Israel and in coffee. The main question mark is Sabra’s growth rates.”
Reuters contributed to this report.