Notch View Capital Management letter to Whole Earth Brands, Inc
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January 3, 2024
Whole Earth Brands, Inc.
125 S. Wacker Drive, Suite 1250
Chicago, IL 60606
Attn:
Board of Directors of Whole Earth Brands, Inc.
Irwin Simon, Chairman
Rajnish Ohri, Co-Chief Executive Officer
Jeffrey Robinson, Co-Chief Executive Officer
Bernardo Fiaux, Chief Financial Officer
Dear Ladies and Gentlemen,
We are writing on behalf of funds managed by Notch View Capital Management, LLC (“Notch View” or “we”), which currently own 5.9% of the outstanding shares of Whole Earth Brands Inc. (“Whole Earth” or “the Company”), making Notch View the second largest owner of the Company’s stock. Notch View seeks to identify attractive mid-cap businesses that have been undervalued by the public markets and will often partner with management teams to enhance long-term shareholder value creation. We have been shareholders of Whole Earth since August of 2021 and appreciate the dialogue we have had with the management team and the Board of Directors (the “Board”) over the last two years.
As we all know, Whole Earth was approached by its largest shareholder in June of 2023 with a preliminary offer to acquire the Company for $4.00 per share1, representing a 28% premium to the prior-day’s share price. We applauded the Company for taking this offer seriously and subsequently hiring Jefferies to conduct a comprehensive strategic review.
Unfortunately, it has now been more than six months since the Company received this bid and since then, Whole Earth’s shares have declined 13%, remaining below the June 2023 bid and meaningfully underperforming major market indices2. We believe six months should be more than enough time to evaluate this bid, negotiate with the bidder or seek out a more attractive alternative. Dragging this process out any longer is unreasonable and value destructive to shareholders.
Moreover, we strongly believe this strategic review should result in a sale of the Company. We do not think a standalone plan for Whole Earth in its current form is a feasible option and believe this would likely result in significant shareholder value destruction and a long road ahead to rebuild it. Whole Earth has a buyer who is ready, willing, and able to acquire the Company in its entirety. We strongly encourage the Board to negotiate in good faith with the potential acquirer and agree on a price that is suitable for all parties involved.
Whole Earth came public through a transaction with a Special Purpose Acquisition Company (“SPAC”), known as Act II Global Acquisition Corp. (“Act II Global”), in June 2020. Act II Global acquired Merisant Company (“Merisant”), a leading branded sugar replacement business, and MAFCO Worldwide LLC (“MAFCO”), a leading flavors & ingredients supplier. These two businesses were subsidiaries of Flavors Holdings Inc. (“Flavors Holdings”), a company owned by MacAndrews & Forbes Incorporated.
In the original SPAC presentation filed with the Securities and Exchange Commission on December 19, 2019 (“the original SPAC presentation”), the Company furnished a five-year forecast for revenue, gross profit, adjusted EBITDA and free cash flow. As can be seen below in slide 17 of the presentation, the forecasted targets called for 2023 estimated revenue of approximately $358 million, adjusted EBITDA of approximately $91 million and company-defined free cash flow of approximately $86 million.
In the two years following the publication of the above forecasts, Whole Earth spent over $300 million on two major acquisitions345. The company acquired Swerve, L.L.C. (“Swerve”), a manufacturer of sugar-free plant-based sweeteners and WSO Investments, Inc., the holding company for Wholesome Sweeteners Incorporated (“Wholesome”), North America’s leading organic sweetener brand. At the time these acquisitions were announced, the Company anticipated that Swerve would generate approximately $5 million of adjusted EBITDA in 20203 and Wholesome would generate approximately $23 million of adjusted EBITDA in 20204.
Assuming no growth in both acquired companies’ adjusted EBITDA through 2023, these acquisitions should have added $28 million to the approximately $91 million forecast in the original SPAC presentation, resulting in 2023 adjusted EBITDA of approximately $119 million. The Wholesome transaction also included an earn-out of $55 million which would only be triggered if Wholesome reached approximately $30 million of adjusted EBITDA between August 29, 2020, and December 31, 20216. As this earn-out was paid in full during the first quarter of 20227, we assume that 2023 EBITDA adjusted for these two acquisitions should have been even higher than $119 million had the Company met its targets for the remaining business.
Instead, as of the end of the third quarter of 2023, Whole Earth’s guidance for 2023 adjusted EBITDA is a range of $77 million to $79 million, leaving the Company on track to miss their 2023 EBITDA forecast adjusted for acquisitions by more than 33%. In addition to materially underperforming its long-term plan, the Company also issued mid-year downward revisions to its full-year forecast for adjusted EBITDA in 2022 and revenue in 20238, adding to a pattern of consistently missing financial targets.
While profitability has fallen short of expectations, the Company’s debt balance has increased meaningfully following the acquisitions of Swerve and Wholesome. Prior to the announcement of these transactions, the Company had approximately $84 million of net debt or 1.6x the Company’s trailing twelve month adjusted EBITDA9. Including the Wholesome earn-out, these acquisitions resulted in a cash outflow of $290 million. As of the latest quarter ending September 30, 2023, Whole Earth had over $411 million of net debt or approximately 5.4x trailing twelve month adjusted EBITDA10.
Whole Earth has expressed in corporate presentations that the Company has a long-term leverage target of less than 3.0x but will retain flexibility to go above this level for M&A as long as they can utilize free cash flow to de-leverage back to less than 3.0x “within a reasonable period of time”11. On the Company’s fourth quarter 2020 earnings call, following the acquisitions of Swerve and Wholesome, management reiterated that reducing balance sheet leverage was a corporate priority and targeted a ratio of net debt to EBITDA of approximately 4.0x by the end of 2021. Instead, the Company’s leverage ratio has increased each year since the announcement of these acquisitions, reaching 4.4x by the end of 2021, 5.1x by the end of 2022 and 5.4x in the most recently reported quarterly results12.
We believe part of the reason leverage has been moving in the wrong direction is because the Wholesome and Swerve acquisitions were both funded primarily by floating-rate bank debt during a period when interest rates were materially below current levels. The rapid rise in interest rates and the Company’s exposure to variable rate debt resulted in cash flows being diverted away from reducing the principal amount of debt, to instead servicing the debt through higher interest payments. Unlike many other companies, Whole Earth failed to fix their floating rate debt with interest rate swaps during the low-rate environment that persisted throughout 2020 and 2021.
In addition to materially higher interest payments required to service the Company’s debt, missteps related to the Company’s supply chain have also diverted cash flows away from de-leveraging the balance sheet. The Company began having issues with its supply chain in the fourth quarter of 2021 and has since spent nearly $37 million on non-recurring cash expenses related to its Supply Chain Reinvention Program13. While this issue is now mostly behind the Company, it has still resulted in less free cash flow available for debt reduction.
We believe Whole Earth's current financial leverage of 5.4x net debt to EBITDA is at a level that is hardly acceptable in this higher interest rate environment. We agree with the Company’s messaging over the last several years that the appropriate amount of financial leverage for Whole Earth remains below 3.0x net debt to EBITDA. Based on our expectations and consensus estimates14 for growth and free cash flow generation, a target of roughly 3.0x net debt to EBITDA will not be achieved until sometime in 2027. This means that not only did the Company carry a level of financial leverage materially higher than its long-term target of less than 3.0x net debt to EBITDA in 2021, 2022, and 2023, but will likely remain above that level for at least the next three years as well. Operating with a level of financial leverage well above the Company’s long-term target for six years is completely unacceptable in our view.
We originally invested in Whole Earth as we believed the Company would be able to grow revenues, improve margins and generate a substantial amount of free cash flow, allowing the Company to quickly de-leverage the balance sheet and increase shareholder value. However, the combination of consistently poor financial performance relative to Company targets and increasing leverage during a period of rising interest rates has contributed to stagnant adjusted EBITDA, poor free cash flow generation, and an overly indebted balance sheet. The result is a share price that is down nearly 66% since the announcement of the SPAC transaction15.
We understand management’s goal is to improve financial performance and free cash flow generation over the coming years. While we acknowledge that if achieved, this should improve shareholder value over time, we also know that a standalone plan is not risk-free and, as discussed in this letter, the Company has a consistent track record of missing financial forecasts. Even with a material change in operating trajectory and solid execution against consensus expectations, Whole Earth will continue to have an overly indebted balance sheet for many years to come, making this a difficult investment for many prospective shareholders in this higher interest rate environment.
We believe the consequence of inaction by the Board as it relates to the strategic review will be Whole Earth remains an illiquid, small market capitalization company with an over-leveraged balance sheet for the foreseeable future. We believe this represents an extraordinarily uphill battle for Whole Earth as a public company and would be an inferior outcome for the Company’s shareholders relative to a sale.
An immediate sale of the Company is a risk-free alternative that gives shareholders an exit at a premium to the current share price. We urge the Board of Directors to negotiate in good faith with potential acquirers and agree on a sale price that is satisfactory for all shareholders.
We have had significant dialogue with the Company since the strategic review process was initiated and have supported the Company’s comprehensive review of alternatives to maximize shareholder value. We are surprised by the lack of updates on the progress of the review despite a significant amount of time passing since the Company received the initial bid. We believe that anything but a sale of the Company in its entirety is not an acceptable outcome of the strategic review process, and we look forward to engaging with the Board in a more influential role to assist in enhancing shareholder value.
Sincerely,
Keith Goodman
Managing Partner
Notch View Capital
Source:
https://www.sec.gov/Archives/edgar/data/1753706/000091957424000042/d10928795_13d-a.htm