Shares of Hain Celestial Group Inc. jumped 8.5% Friday, a day after an activist hedge fund disclosed a large stake in the organic food company and started to push for a sale and an overhaul of its board.
Hain Celestial HAIN, +8.56% know for its herbal teas, fruit and vegetable juices, gluten-free products and seasonings, is still recovering from an accounting scandal that obliged it to restate a year’s worth of financial statements. The restatement came about after Hain uncovered revenue irregularities last year, shortly after it had hired a new head of accounting. Just last week, the company named a new finance head as it released the numbers, which it said didn’t involve any material changes.
The company is being investigated by the Securities and Exchange Commission, and was threatened with a possible delisting by Nasdaq if it hadn’t met a June 30 deadline for the restatement.
Engaged Capital, a California-based hedge fund, has amassed a 9.9% stake and is pushing the company to sell itself. The hedge fund has nominated 7 candidates for election to the board. It comes to Hain fresh from a similar battle with Rent-a-Center RAC, -1.69% which won it several board seats. In the past, Engaged Capital has acted to bring change to Boulder Brands, which was acquired by Pinnacle Foods Inc. PF, -0.98% in a deal announced in late 2015, and SunOpta, a Canadian organic food producer.
“We are not surprised to learn of activist involvement in Hain given the company’s audit review/SEC investigation, execution missteps and portfolio complexity of non-synergistic businesses,” said Steven Strycula, analyst at UBS.
UBS is skeptical the company can meet its fiscal 2018 Ebitda guidance for growth of 33% from the year earlier, given price gaps, consolidation in the industry and rising private label risk.
“That said, Hain does have a handful of differentiated brands that we believe have potential to grow into larger revenue dollar, multifaceted brands under strong stewardship,” the analyst wrote in a note.
UBS rates the stock a sell.
J.P. Morgan analysts said they are typically in favor of breakup stories, but questioned whether even a board overhaul or strategic change can create value at Hain.
They listed a number of reasons for that view, including that the company has already announced a 20% reduction in SKU (stock keeping units), has unveiled the biggest cost savings program of any U.S. food company and is unlikely to be sold outright.
Analysts don’t believe the stock offers a compelling valuation measured on a sum-of-the-parts basis and agreed with UBS that is guidance is optimistic.
“Thus, though we would not short the HAIN shares here—this might be too risky given that staples investors today are somewhat desperate for event-oriented stories—we also would be careful before adding to positions,” they wrote.
Hain shares have fallen 0.6% in 2017, while the S&P 500 has gained 8%.
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