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Ampera Capital LLC
“Come for the big acquisition, stay for the S&P
500 index inclusion”
Long TreeHouse Foods Inc. (NYSE:THS)
Prepared by Nick Mazing
Ampera Capital
nick.mazing@amperacapital.com
December 2015
Downloaded from www.hvst.com by IP address 78.47.27.170 on 2016/10/21
Disclaimer
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Duplication and distribution expressly prohibited
Not an offer to buy or sell any securities
Not a recommendation or a suggestion of any kind
This presentation does not create a client relationship
The information presented is fully publicly available and believed to be accurate
but is not guaranteed to be so
Any opinions and estimates presented are subjective by nature, likely to be
inaccurate, and can change at any time
There is no duty to update any statement contained here
Ampera Capital (“Ampera” or “we”/“our”) currently has a LONG position in
TreeHouse Foods (“THS” or “the Company”) but this can change at any time
Ampera may have positions in other securities mentioned here for comparative,
contextual or historical purposes
Prepared by Ampera Capital LLC: please read the disclaimer
2
Table of Contents
I. Executive summary
II. Introduction and thesis
III. Private label primer: structural tailwinds
IV. Platform companies in US food: the model works here
V. TreeHouse Foods acquisition of ConAgra Foods Private
Brands
VI. Why the opportunity exists
VII. “New” TreeHouse valuation
VIII. Risks and uncertainties
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Executive Summary
4
Executive summary
 TreeHouse Foods (NYSE:THS) stands to re-rate by year-end 2016
as the company integrates ConAgra’s Private Brands division and
laps some discrete challenges from 2015
 Ampera sees a 20% return 1-year total return from a steady food
company, managed by one of the best “platform” teams in food
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Introduction and thesis
6
 Ampera Capital LLC (“Ampera”) is an emerging NY-based
Long/Short manager that focuses on consumer equities
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Founder is a former consumer banker at Lehman and operator at Aramark
Published ideas in the last two years include:

Avon AVP (S), Tyson Foods Units/Common TSNU-TSN (L/S), Potbelly PBPB (S),
El Pollo Loco LOCO (S), Philip Morris Int’l PM (L), Arcos Dorados ARCO (L)
 Amepera has established a LONG position in TreeHouse Foods
 TreeHouse Foods is the only “pure-play” private label food
manufacturer in the US, currently ~doubling its revenues by
acquiring ConAgra’s (“CAG”) private label business (Q1 2016
anticipated deal closure)
 THS stands to re-rate in 2016 as it laps discrete problems from
2015 and progresses with the CAG integration
 Ampera sees THS at above $100 by YE 2016, ~20% total return
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 With TreeHouse Foods, an investor gets
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The stability of a diversified food company
Structural tailwinds from private label exposure
One of the best “platform” management teams in the industry
Re-rating upside from potential S&P 500 index inclusion
 Why the opportunity exists
 THS had some discrete problems in 2015
 Predominantly related to single-serve coffee (discussed later) and the latest
acquisition in nuts/snacks (appears resolved)
 The market reaction to the timeline of the CAG Private Brands acquisition
was volatile due to the timeline of the integration/synergies and “fast money”
in the stock due to months-long deal dynamics leaks, in Ampera’s view
 Ampera sees THS going to over $100 by year-end 2016, from ~$85
now as the company laps 2015 and makes integration progress
Sources: Company conference calls
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 TreeHouse Foods basics (as of December 04, 2015)
 TreeHouse Foods is the only publicly traded US private label food
manufacturer
 “Private label” refers to retailer’s own brands, such as “365” at Whole Foods
(“WFM”) or Great Value at Walmart (“WMT”)
 Cott Corp. (“COT”) is the other private label name, 100% in carbonated soft
drinks, juices, energy drinks and water
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LTM net revenues of $3.25 bn, EBIT $239 mm, NI $112 mm
Enterprise value $4.99 bn, Market Cap $3.69 bn
Current share price $85.73, 52-wk range $69.01-$92.92, no dividends
Shares outstanding 43.1 mm, short interest 8.2%, 3-mo ADV 448k
Credit: Ba2/BB; net leverage: 3.56x
All metrics are presented “as is” (NOT pro-forma of the CAG deal)
Sources: Bloomberg, CapIQ
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 TreeHouse Foods basics
 Sales Mix (2014): US ~88%, Canada ~11%
 Major products (2014): beverages 17%, dressings 12.3%, beverage
enhancers 12.2%, soup and infant 11.9%, pickles 10.3%, snacks 9.8%,
sauces 8.5%, cereals 5.7%, dry dinners 4.7%, other 7.6%
 Customer concentration (2014): WMT 18.8% (down from 20.7%
2YA)
 THS was formed in 2005 as a spinoff of the specialty foods
business of dairy leader Dean Foods (“DF”) with revenues of $700
mm and primarily two product lines, pickles and non-dairy creamer
 THS has grown steadily via acquisitions over the last 10 years,
completing 10+ acquisitions in “adjacent” categories and scaling up
to over $3.2 bn in LTM revenues
Sources: Company filings
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Sources: TradingView
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Private label primer: structural tailwinds
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 Key take-away: as a large player in private label, THS enjoys
structural tailwinds from private label taking share from branded
products
 Private label tailwinds
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Private label in the US is growing in share
Private label in the US is very under-penetrated compared to Western Europe
Private label “works” and has evolved from “low cost” to “national brand equivalent”
to sophisticated “destination brands” central to store strategy in some cases
Room for private label to grow both with the hard discounters and within the growing
dollar category
 Well-known private labels in the US include
Sources: Nielsen, THS presentations, corporate websites; logos used for illustrative purposes only
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products
 Private label tailwind #1
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Private label in the US is growing in share
Sources: Nielsen Nov 2014 report “The State of Private Label Around The World”
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products
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Private label in the US is very under-penetrated compared to Western Europe
Sources: Nielsen Nov 2014 report “The State of Private Label Around The World”
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products
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Private label has evolved from “lowest cost” to “national brand equivalent”
to sophisticated “destination brands” central to store strategy in some cases
Example: 365 by Whole Foods as a conservation campaign brand partner
Example: Simple Truth (natural private brand) by Kroger with 10%+ growth
PRIVATE BRAND
Sources: WFM and KR IR materials
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products
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Private label “works” for the retailers!
Sources: CAG 2014 CAGNY deck
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products
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Room for private label to grow both with the hard discounters and within the growing
dollar category
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Aldi, a privately held hard discounter, has grown to 1,400 US locations (for comparison, Kroger has 2,620
units, Safeway has 1,326, Costco has 481 units, Whole Foods 422)
Sources: Company websites, Nielsen Accessed 12/04/2015 http://www.nielsen.com/us/en/insights/news/2014/how-10-retailers-arepushing-private-labels-potential.html
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Platform companies in US food: the model works here
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 “Platform companies” as a concept are not new
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The term “platform company” was recently popularized by Pershing
Square/Bill Ackman in the context of marketing Pershing Square’s holdings
in several industries, including durable consumer products company Jarden
(NYSE:JAH), chemicals Platform Acquisition Holdings (NYSE:PAH), newly
started Nomad Foods (LON:NHL), and the highly controversial Valeant
Pharmaceuticals (NYSE:VRX)
Other terms include “industry consolidator” and “roll-up”
There is a well-known history of problematic roll-ups: Tyco, MCI WorldCom,
Waste Management, and others
Recent roll-ups subject to well publicized, large scale shortselling efforts
include Valeant Pharmaceuticals (pharma) and LKQ Corp (junkyards)
 Reasons behind the skepticism include
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Aggressive accounting
Size limits and leverage
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 Perhaps the most scathing academic criticism comes from HBR’s
famous article Seven Ways to Fail Big (9/2008)
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“research shows that more than two-thirds of roll-ups have failed to create any value
for investors”
“many roll-ups were afflicted by fraud”
“there wasn’t much to be gained from achieving scale”
“Nor did increased size improve the company’s cost of capital”
“roll-ups cannot sustain their fast rate of acquisition”
“roll-up strategies often fail to account for tough times, which are inevitable. A roll-up
is a financial high-wire act”
“enormous value lies in learning from companies that have lost millions, if not billions,
in pursuit of fundamentally flawed strategies”
Full article here
Sources: HBR, accessed 12/05/2015 https://hbr.org/2008/09/seven-ways-to-fail-big
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 Criticism of roll-ups also comes from professional short-sellers, as
seen in the Prescient Point report on LKQ (junkyard roll-up)
Sources: Prescience Point, accessed 12/05/2015, http://www.presciencepoint.com/reports/lkq_short_thesis_final.pdf
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 Even the most vocal supporter of platforms, Pershing Square, is
realistic about the limitations of the platform strategy
Sources: Pershing Square presentation, accessed 12/03/2015 https://www.pershingsquareholdings.com/media/2014/09/Ira-Sohn-2015Presentation.pdf
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 The platform model in smid cap US food is well-established, both
on the branded and the private label sides of the business
 While some companies are openly more acquisitive than others,
even the largest ones regularly acquire “on trend” smaller
competitors, and put them “on the platform”
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Very visible examples include
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Coca Cola: Glaceau (Vitamin Water) and Honest Tea
Pepsico: Odwalla
Reynolds American: American Spirit
McCormick: Lawry’s Seasoned Salt
 Companies in US food that have acquisitions as a strategy
centerpiece are TreeHouse Foods (THS), Post Holdings (POST),
B&G Foods (BGS), Pinnacle Foods (PF) and WhiteWave Foods
(WWAV)
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All well-known issuers in the capital markets with 3.5-5.5x leverage
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 Key take-away: THS is a platform company with proven
management in an industry where the platform approach works.
Sources: THS IR materials
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 Key take-away: THS is a platform company in an industry where
the platform approach works > BGS example
Sources: BGS IR materials
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the platform approach works > PF example
Sources: PF IR materials
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the platform approach works > WWAV example
Sources: WWAV IR materials
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the platform approach works > POST example
Jan 2015
Sept 2014
Sept 2012
Sources: Company annual report and company filings
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 Not all acquisitions work as planned: management teams in food
are pretty straight-forward about issues as they occur
 THS had some problems with Flagstone Foods
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Ampera believes the problems have been addressed
Had a $3 mm write-off on an older, small acquisition in 2013
 POST had some problems with Dymatize and Premier Nutrition
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Recent write-offs
 POST had major problems with bird flu in 2015 in their recent
Michael Foods acquisitions
 BGS had some problems with Rickland Orchards
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Led to a write-off
Sources: Company conference calls and company filings
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the platform approach works> Summary from Pershing Square
Sources: Pershing Square presentation, accessed 12/03/2015 https://www.pershingsquareholdings.com/media/2014/09/Ira-Sohn-2015Presentation.pdf
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TreeHouse Foods acquisition of ConAgra Foods Private Brands
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THS acquisition of ConAgra Foods Private Brands
 On November 2nd 2015 THS announced the acquisition of
ConAgra’s (“CAG”) Private Brands business for $2.7 bn
 The business consist mostly of “old Ralcorp” assets and will
diversify and scale-up THS (~double the revenue of the company)
 The transaction is expected to close in Q1 2016
 The financing is expected to consist of $1.8 bn of new debt and
$1.0 billion of new equity ($100 mm in transaction expenses)
 THS has guided to 2017 accretion of $0.55-$0.70/share and 2018
accretion of $1.50-$1.65/share
 THS has guided to pro-forma leverage of 4.3x and pro-forma
paydown schedule of 0.6 turns per year
 Key take-away: THS made a smart large acquisition, did not
overpay, and may have under-promised
Sources: Company press release
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 THS paid a very reasonable multiple for an admittedly troubled
business while gaining substantial scale and product diversification
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Recent comparable transactions have been in the 13-17x LTM EBITDA range including LNCEDMND, PF-BDBD, TSN-HSH, SJM-Big Heart Pet Brands and POST-Michael Foods
Sources: Company press release
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 Select background on CAG Private Brands business
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1994: Ralcorp (old ticker “RAH”) spin from Ralston
2008: RAH buys Post cereal from Kraft Foods
2011: RAH buys Sara Lee’s dough business
2011: CAG makes an attempt to acquire RAH
2012: RAH spins Post Holdings (POST, mentioned previously)
2012: RAH under activist pressure is acquired by perennial underperformer
CAG in a widely questioned deal (highly unusual to have branded and private
label products under one roof due to obvious conflicts with client servicing
and internal capital allocation)
2013-2015: CAG mismanages the business to a comical extent (ie 70%
order fill rates compared to industry level of 98%+) (see Barcap 11/17/15 note)
2015: CAG under (different) activist pressure and with a new CEO agrees to
sell most of “old RAH”. The deal dynamics were widely leaked in the press,
including POST dropping out, which led to “fast money” flows in THS, in our
view
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Why the opportunity exists
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 The opportunity exists for three reasons
 Reason #1: THS shares have suffered in 2015 due to several
surprise disappointments in the single-serve coffee business
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Ampera believes that THS will be lapping these challenges in 2016
More detailed dynamics of the business to follow
 Reason #2: THS has been careful with its guidance on integration
timeline and accretion due to the deteriorated state of the CAG
Private Brands business, as well as the large scale of the endeavor
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Several complicating and mitigating factors
Sheer size and timeline (specifically, duplicative functions stemming from the
Transition Services Agreement with CAG)
THS management team has presented a detailed plan, and, more importantly
it has retained 11 of the top CAG Private Brand managers as well as the prior
RAH CEO to assist with the transition, which, in our view, is a huge positive

Lowers integration risk AND expands the THS bench depth
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 The opportunity exists for three reasons (continued)
 Reason #3: shareholder base dislocation in 2015. Based on our
research, Ampera believes that the numerous press leaks during the
CAG sale process led to an inflow of “hot money” in THS which
contributed to the volatility surrounding the deal announcement
and the somewhat disappointing Q3 results
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More detailed discussion to follow
Deal day volatility consistent with volatility around prior earning
announcements possibly due to momentum strategies entering the stock at alltime highs late 2014-early 2015
Similar price action observed in two other recent packaged food acquisitions
Snyder-Lance (“LNCE”) - Diamond Foods (“DMND”) on Oct 28, 2015
Pinnacle Foods (“PF”) - Boulder Brands (“BDBD”) on Nov 24, 2015
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 Reason #1: single-serve coffee dynamics
 Key take-away: THS will start to lap a series of negative surprises in
2015 due to irrational behavior in private label kcups by Keurig
Green Mountain (“GMCR”), a troubled company creating one
disaster after another, in our view
 Detailed version of the coffee dynamics, in our view
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For simplicity, kcup will refer to the kcup format regardless of whether it is a
GMCR, GMCR-licensed or non-licensed product
Single-serve coffee (kcup format) has been a solid category grower for years
GMCR paid up to acquire its old kcup licensees and consolidate production
(i.e. the Diedrich Coffee DDRX bidding war)
THS has been in the single-serve beverage space for years following the
Sturm Foods acquisition in 2010
THS and smaller players invested in replicating the kcup technology as it was
rolling off patent
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 Detailed version of the coffee dynamics, in our view (continued)
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THS and the smaller players are “unlicensed” producers of kcups as they do
not pay anything to GMCR
THS even had an earlier product with instant coffee since the patent related
to the in-pod filter system
THS sued GMCR as GMCR had made attempts (allegedly) to restrict THS’s
access to production line and other technology as a way to deter independent
production
GMCR attempted to “tighten” the system by using “2.0” brewer technology
which would not brew unlicensed cups, including refillables
The 2.0 rollout was a flop, in our view, leading to customer confusion/anger,
proliferation of easy “hacks”, and the unlicensed players had no problems
reverse-engineering the supposedly secure technology
Instead of protecting the industry profit pool, GMCR, in our view, made an
irrational attempt to capture major private label accounts by competing on
price
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 Detailed version of the coffee dynamics, in our view (continued)
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Private label kcup profit pool collapsed and THS had surprise consecutive
guidedowns
Hopefully THS will be lapping these numbers in 2016 without further
deterioration
THS is optimistic on the sub-$100 non-GMCR brewers, WMT even has sub
$50 brewers this season
GMCR announced the morning of the publication of this report that it is
being acquired by private coffee giant JAB Holdings: hopefully the new
owner will compete rationally
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THS did not acquire all of “old RAH”
THS has guided to ~$3.6 bn in revenues and ~$300 mm in EBITDA
Sources: THS deck Nov 2015 Analyst Day
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Compare the ~$3.6 bn /~$300 mm in EBITDA to CAG’s 2013 run-rate
guide for RAH of $4.3 bn and ~$430 mm in EBIT alone
Sources: CAG 2013 CAGNY deck
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Stand-alone RAH ran average 7.4% adj EBIT margin in 2010-2012
Sources: RAH 2012 10-K filing
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Stand-alone RAH ran average 7.4% adj EBIT margin in the 2010-2012
Stand-alone RAH ran average D&A of 4.2% of sales in 2010-2012
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Stand-alone RAH ran an estimated standalone public co. average EBITDA
margin of 11.6% of sales in 2010-2012 (very close to THS ~12%)
Yet THS is guiding to ~8% PF improving to 9% . Why?
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Sources: RAH 2011 and 2012 10-K filings; THS Analyst Day deck, Ampera calculations
45
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Stand-alone RAH ran an estimated average EBITDA margin of 11.6% of
sales in 2010-2012 (very close to THS ~12%)
Having followed THS for a number of years, Ampera believes that
THS management does not want to overpromise and underdeliver
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Management is fully aligned: high insider ownership, ~5% as of the last proxy statement
The size of the acquisition is substantial
It appears that CAG was forced to give price concessions to clients due to its
operational problems mentioned before (70% order fill rates)
THS has taken extraordinary steps to ensure a smooth integration
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Kevin Hunt, long-time CAG CEO (and executive prior to promotion) is on-board
11 of the top managers are staying, which also deepens the THS management bench
46
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Stand-alone RAH ran an estimated average EBITDA margin of 11.6% of
sales in 2010-2012 (very close to THS ~12%)
Additional reasons include the introduction of new product lines, a larger
facility footprint and the uncertainty around the duplicative cost time period
Sources: THS Analyst Day deck
47
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Ampera believes that THS has one of the best management teams in the
business (grew and sold Keebler Foods, and then started with a subpar spin
from Dean Foods to become the dominant private label firm with an
expertise in integrating acquisitions)
Ampera is comfortable with the currently disclosed plans for integration, and
believes that THS will overdeliver based on “old” RAH metrics and
management track record
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Integration efforts under a steering committee with CFO overseeing business
operations and Chief Strategy Officer and a Transitional Services Agreement/CIO
lead overseeing the overhead integration
Again, the long-term pre-CAG RAH CEO is on-board with THS for the process
as are top 11 operations manager from CAG-RAH
No risks taken around key manager departures
Sources: THS Analyst Day deck
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 Reason #3: shareholder base dislocation in 2015
Large intra-day drop on deal announcement
followed by recovery in 3 days
THS hits numerous alltime highs, possibly
attracting momentum
strategy flows
Uncharacteristic volatility around earnings,
possibly due to momentum strategies selling
CAG earnings call
starts deal speculation
49
 Reason #3: shareholder base dislocation in 2015. THS situation
similar to the recent LNCE-DMND and PF-BDBD deals
Large 10%+ intra-day drop on deal
announcement followed by recovery to
all-time highs in 3 days
LNCE hits numerous all-time highs, possibly
attracting momentum strategy flows
50
 Reason #3: shareholder base dislocation in 2015. THS situation
similar to the recent LNCE-DMND and PF-BDBD deals
PF hits numerous all-time highs, possibly
attracting momentum strategy flows
Aug 24 2015 flash crash
Late Sept drop also observed in POST, possibly related to hedge
fund Tiger Ratan, holder of both PF and POST. Ratan
suffered substantial losses in September due to its large
position in Valeant, according to press reports
Large intra-day drop on deal
announcement followed by full
recovery in one day
51
“New” TreeHouse valuation
52
“New” TreeHouse Valuation
 Ampera estimates that THS can reach $100/share by Y/E 2016
Sources: THS Analyst Day deck and Ampera estimates
53
 Traditionally, THS has been comped against the US SMID food
names. “New” THS valuation multiple should move towards its
larger peers, in our view.
2-turn premium of S&P 500 names vs. SMID comps
Sources: Bloomberg as of 12/04/2015
54
 Ampera’s differential view comes from our estimate that THS may
be included in the S&P 500 index with its new capital structure
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Ampera correctly predicted in our published Short Avon thesis in September
2014 that Avon will be dropped from the S&P 500 index
With a price of $100+/share and the deal equity issuance, THS will be larger
than over 35 index components based on current market capitalization
These 35+ components include several consumer names including
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Fossil Group (under $2 bn market cap)
Urban Outfitters (under $3 bn market cap)
GameStop (under $4 bn market cap)
ADT (under $6 bn market cap)
 Key take-away: “New” THS could re-rate away from its traditional
SMID cap food comps towards the S&P 500 food comps with or
without index inclusion
55
Risks and uncertainties
56
Risks and uncertainties
 The obvious risks are listed in the THS filings: Ampera would like
to discuss some emerging risks
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Deal closing timeline/dependence on financing as high yield spreads are blowing out: Ampera has
suggested to THS to consider raising half of the equity NOW, possibly from a PE fund
which can commit to holding over a period of time. A mitigating factor is that THS is a wellknown issuer and large consumer deals were financed and closed Nov 08-Jan 09 (ABI/BUD and
MO/UST)
Walmart Investor Day comments: a recurring question on food company calls has been Walmarts
announced focus on price. There has been no concrete consistent comments (yet) as to how this is
affecting the industry. THS scaling up is a mitigating factor
Deal size: the deal is substantially larger than what THS has done in the past. Mitigating factors, as
previously discussed are the retention of RAH’s old CEO and the top business managers
Staples valuations: while staples have historically outperformed in the late stages of the market
cycle, two complicating factors this time are that valuations are higher than historical norms almost
across the board, and the heightened sensitivity of consumer staples to adverse moves in interest
rates (as seen in the XLP vs SPY performance from late October into November this year). This is
a future market risk
Continued problems in single-serve coffee: we cannot speculate on future developments in the
space. A mitigating factor is that “New” THS will have substantially lower reliance of coffee
57

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