Utz Brands to Acquire ON THE BORDER® Tortilla Chips

Expands Position in Attractive Tortilla Chip Sub-Category

16-Nov-2020 - USA

Utz Brands, Inc. (NYSE: UTZ) (“Utz” or the “Company”), a leading U.S. manufacturer of branded salty snacks, announced that its subsidiaries Utz Quality Foods, LLC (“UQF”) and Heron Holding Corporation have entered into a definitive agreement to acquire Truco Enterprises (“Truco”), a leading seller of tortilla chips, salsa and queso under the ON THE BORDER® (“OTB”) brand, from Insignia Capital Group for a total purchase price of $480 million, subject to a customary post-closing purchase price adjustment. The acquisition includes all rights to the ON THE BORDER® trademarks for use in the manufacture, sale, and distribution of snack food products in the United States and certain other international markets. The transaction represents an acquisition multiple of approximately 9.2x estimated fiscal 2020 Truco Adjusted EBITDA of $50 million excluding estimated synergies, and 8.4x estimated fiscal 2020 Truco Adjusted EBITDA including run-rate cost synergies of at least $5 million, in each case including approximately $20 million in net present value from expected tax assets resulting from the transaction. Utz expects the transaction to be accretive to earnings in 2021 and beyond. The transaction is expected to close in December 2020 and is subject to customary closing conditions including the receipt of regulatory approvals.

Photo by Roberto Carlos Roman on Unsplash

The ON THE BORDER®brand provides Utz a growing Power Brand with significant scale in the attractive $6.2 billion retail sales tortilla chip sub-category, the #2 sub-category in salty snacks behind potato chips, as well as a meaningful presence in salsa, queso, and dips, and a strong innovation pipeline. The transaction also strengthens Utz’s national geographic footprint, with the majority of OTB’s sales in Expansion and Emerging geographies, and enhances the Company’s presence in the Mass and Club retail channels where OTBhas a strong position. Utz plans to use its robust sales, manufacturing, and distribution platform to expand ON THE BORDER® tortilla chips, salsa, and queso further into channels where OTB is under-penetrated, including Grocery and Convenience, and to increase marketing and innovation investments behind the brand.

“This strategic acquisition will make Utz a significant competitor in the tortilla chip sub-category, where OTB holds the #3 position, and also provides us with a meaningful position in salsa, queso, and dips,” said Dylan Lissette, CEO of Utz. “In combination with our small but growing premium Tortiyahs!® brand, the integration of the ON THE BORDER®brand will continue to improve Utz’s scale and product diversification, which are important success factors in salty snacks. This acquisition strengthens our competitive position, as well as our financial profile. We are confident this transaction will drive long-term value creation for our stockholders and help position us for continued long-term growth.”

“The Truco team is thrilled to be joining the Utz family of brands, and we are thankful to our partners at Insignia Capital for all of their support,” said Shane Chambers, CEO of Truco Enterprises. “ON THE BORDER® is now one of the fastest growing tortilla chip brands, and the fastest growing dip brand in the category. Utz will be able to leverage its world class Direct Store Delivery network to help expand our brand into new markets. As a result, more consumers across the U.S will have access to our delicious, high quality tortilla chips and dips. I’m looking forward to working with Dylan and the rest of the Utz senior management team to continue our excellent growth trajectory.”

Strategic Rationale

The combination of Utz’s existing portfolio of Power Brands, including Utz®, Zapp’s®, Golden Flake® Pork Skins, Good Health®, Boulder Canyon®, Hawaiian® Brand, and Tortiyahs! ®, with the ON THE BORDER® brand of tortilla chips, salsa, queso, and dips, will uniquely position Utz as a leading player in the $28 billion U.S. Salty Snack category. ON THE BORDER® is currently the #3 brand in the $6.2 billion retail sales tortilla chip sub-category, the second largest sub-category of salty snacks. Tortilla chip retail sales grew 10% in the 52 weeks ending 10/4/20.1 Further, ON THE BORDER® is a significant player in the growing $1.5 billion retail sales salsa sub-category, and is the #3 brand in the $107 million retail sales queso sub-category. Following the transaction, Utz would have approximately $1.3 billion in total retail sales. The acquisition increases Utz’s presence with leading customers in the Mass and Club channels, and expands Utz’s geographic presence, providing approximately $190 million of retail sales in Utz’s Expansion and Emerging geographies. Along with these topline benefits, Utz expects run-rate cost synergies of at least $5 million.

Compelling Financial Benefits

Utz expects Truco Enterprises to generate approximately $195 million in Net Sales in fiscal 2020, an increase of approximately 32% compared to the prior year, and approximately $50 million of Truco Adjusted EBITDA in fiscal 2020, excluding expected run-rate cost synergies. Truco Enterprises’ business has benefited from the COVID-19 pandemic, which has helped drive strong performance in the company’s Mass, Club, and Grocery channels. The combined company’s fiscal 2020 Adjusted EBITDA margin, including the pre-acquisition Truco Adjusted EBITDA margin and the expected run-rate cost synergies, is expected to increase to approximately 16% from approximately 14% for Utz stand-alone, based on the Company’s latest guidance. The transaction is expected to be accretive to earnings in 2021 and beyond. Further, due to Truco Enterprises’ asset-light nature through the use of co-manufacturers, Truco Enterprises’ free cash flow contribution to Utz is meaningful, as capital expenditures are nominal and working capital averages approximately 6% of net sales. Utz expects to receive a tax basis step up from the acquisition of intellectual property associated with the trademark with an estimated net present value of approximately $20 million.

Transaction Details

Under the terms of the transaction agreement, Truco will become a wholly owned indirect subsidiary of Utz. The Company has debt financing commitments for the full transaction amount from BofA Securities and Goldman Sachs. Assuming Utz fully draws this commitment, net leverage immediately following the transaction would be approximately 4.8x on 2020E Combined Utz and Truco Adjusted EBITDA including expected cost synergies, and we would expect to return to our stated target net leverage range of 3-4x within 12-18 months after closing, consistent with the financial policy outlined in our SPAC business combination investor presentation.

1 Source: IRI data for MULO + C as of 10/4/20.

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