Smucker's $1.9 Billion Buy

MarketsMotley Fool

In this episode of the MarketFoolery podcast, host Chris Hill talks with Motley Fool Asset Management's Bill Barker about some of the biggest changes in the market this week.

AMC (NYSE: AMC) shares popped a bit this morning after the company announced a deal to expand into Saudi Arabia -- a country that hasn't had any new theatre openings in 35 years.

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Meanwhile, its shares dropped a little after J.M. Smucker (NYSE: SJM) bought Ainsworth Pet Nutrition for $1.9 billion cash.

And finally, a California ruling decreed that coffee sellers across the state must include cancer warning labels on their coffee. Tune in to find out more.

A full transcript follows the video.

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This video was recorded on April 5, 2018.

Chris Hill: All right, let's do this! It's Thursday, April 5th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, from Motley Fool Asset Management, Bill Barker. Thanks for being here!

Bill Barker: Thanks for having me!

Hill: We're finally going to get to the issue that a few of the dozens of listeners have been asking specifically for you and me to weigh in on. And that is, of course, the decision by a judge in California to besmirch the good name of coffee. And we'll get to that. We will get to that. But we've got a couple of deals to start with first.

Let's start with the movie industry. AMC Entertainment shares up a little bit this morning after AMC announced a deal to open 40 movie theaters in Saudi Arabia over the next five years. Maybe the most noteworthy thing about this is the fact that a new theater has not been opened by anyone in Saudi Arabia in 35 years. So, good news for movie fans in Saudi Arabia. But this really seems like AMC Entertainment is playing into the global trend that we're seeing of movie theaters outside North America growing.

Barker: Yeah. They have been growing by acquisition. They made some major acquisitions in 2016, I think, the Odeon chain, which is in England and elsewhere, and they bought up some Nordic chain recently in 2017. And that is where the growth is, because you're the only one that still goes to movies in the theater, I believe, in this country. You are the demographic.

Hill: In this room. Yeah. I'm the only one who goes.

Barker: I love movies, it just doesn't happen anymore. I just don't go and spend $75 to see a movie in the theater these days.

Hill: I don't think tickets are quite up to $75.

Barker: Really?

Hill: Not quite.

Barker: Wait until the end of the year. I mean, the inflation on those things is crazy.

Hill: I mean it is pretty startling when you just sort of look at the U.S. and Canada and ticket sales declining in those two countries, and literally everywhere else, it's on the rise.

Barker: Yeah. Well, the rest of the world still is hungry for U.S.-made movies, of course. And theaters. We know something about making a good movie theater or operating it. AMC, at least, is not going to give up. And where there is some growth to be had is outside of this country, and that's where they're pursuing it. Saudi, of course, is uncharted territory because of how they had been operating. Things are loosening up there, which is great, I think, for the populace. You've got women driving now, which got lots and lots of headlines, small a step as it may be. But, it is an indication of something that has needed to happen, and there are a lot of additional steps yet to come, the movie theaters being one of them.

But I can remember being in the UAE, in Abu Dhabi specifically, when I had to work there for a little while about 25 years ago now, and there really weren't any movie theaters there either. There may have been one, but it didn't show foreign movies. So, that that has also loosened up. Things are different in Dubai, and have been. But, there are places in the Middle East that are going in this direction, and AMC is going to sink a chunk of money into building 20, 30 theaters.

Hill: I'm just going to recommend that you see the movie Ready Player One on the big screen. I saw it last weekend. Great movie, very fun, highly enjoyable. And it's one of those movies that's better on the big screen.

Barker: Many are. I think that there are lots of movies that I would like to see on the big screen. There are some I'll see. The Han Solo movie coming out, I'm sure I'll see that big screen. Family is into seeing Star Wars on opening day, that sort of thing. We do that. Avengers. A lot of the Marvel stuff. But all the stuff that doesn't involve things blowing up, I think you can wait and see on Netflix.

Hill: I think that's probably true. We'll move over to the food industry. J.M. Smucker is buying pet food maker Ainsworth Pet Nutrition for $1.9 billion in cash. Shares of Smucker down ever so slightly, but I suppose that makes sense because they just wrote a check for nearly $2 billion.

Barker: Yeah. Smucker's, which one might associate most with the Smucker's jams and jellies and they also have Jiff, they've got about an even split in their three main divisions business -- one being coffee, one being pet food, and one being consumer food. Consumer food, probably, people know Smucker's to be doing. Coffee is brands that people know, Folgers and Dunkin Donuts retail brands -- not the Dunkin Donuts coffee that you get at Dunkin Donuts, but the packaged coffee that you buy in stores and K-Cups and things like that. Then pet food.

And each one of those three things is almost identical in terms of size and the contribution to the sales of the company. Going into today, this new acquisition is going to change that. And while it is, I think, the largest packaged coffee seller in the U.S., I don't know where it ranks in terms of pet food, but the pet food division has grown far faster than the other things. That's indicative of, well, Americans just being willing to spend more on their pets than themselves.

Hill: So, is part of the case for a business like this ... I mean, we've talked before about Pepsi, which owns not just, obviously, the Pepsi line of beverages, but Frito-Lay and all of the snacks there. And one of the advantages that Pepsi has when they're dealing with grocery chains and convenience stores and that sort of thing is the ability to acquire shelf space, because they have all of these different things that they can offer. Is it a similar value proposition for a company like Smucker, that it's like, "OK, we're already dealing with grocery stores and," well, I guess it's more grocery stores than it would be convenience stores, in terms of pet food, but, "We already have the relationships there, and now we've got this new line of pet food that we want to get into the grocery stores as well."

Barker: Yes. And it's also indicative of the fact that more pet food is sold online than a package of coffee or a jar of peanut butter. And they're going to where the sales are growing. There's three different parts to why this acquisition might make sense. One is, the pet food category is growing. The specific element or the specific kind of pet food that they're acquiring here is the higher-end pet food. They acquired, I think it was Big Heart Brands, a couple of years ago. And that's the majority of their pet food sales, I think. So, this Ainsworth, which is best known for the Rachael Ray Nutrish line, is higher-end pet food. You wouldn't know anything about this because you don't have pets, but you can spend the normal amount of money on your pet food, or you can spend lots and lots of money on your pet food.

Hill: If you truly care about your pets, you're going to do the latter.

Barker: That's how the marketing would go, yes. So, Rachael Ray would encourage you to spend lots of money on pet food and get organic or gourmet or that sort of thing. And that's where they're going. Then, also, the higher sales online than their other things.

Hill: So, here's the part of the Smucker's story today that I don't quite understand. They announced this deal, and then separately, Smucker's says they're looking to sell their baking business, which includes several brands, one of which is Pillsbury. Doesn't General Mills (NYSE: GIS) own Pillsbury?

Barker: The Pillsbury doughboy has a two-company loyalty. The baked goods are currently with Smucker's, and the frozen and refrigerated Pillsbury goods are with General Mills.

Hill: So, does the Pillsbury doughboy, much like Jack Dorsey is the CEO of Twitter and Square, the mobile payment company, does the Pillsbury doughboy split his time between General Mills and Smucker?

Barker: It's either that -- we don't know yet -- or there's a clone. I mean, we don't know. There's a lot of speculation as to which it may be, and it's very hard to prove, because they're identical.

Hill: And neither General Mills nor Smucker has ever gone on the record. We don't know why they're not answering questions about the potential of the Pillsbury doughboy being cloned. We just know that they're not responding.

Barker: We know that they have not denied it. They're neither going to confirm nor deny. The reason why the Pillsbury doughboy was split into two, and the goods were split into two, is when General Mills acquired Pillsbury back in the early 90s, I want to say, antitrust required this division.

Hill: Because Pillsbury is just such a massive ... [laughs]

Barker: General Mills, combined with Pillsbury, was unstoppable.

Hill: Much like Google is now.

Barker: Much like the Stay Puft Marshmallow Man, patterned on the Pillsbury doughboy, was unstoppable. Or so it appeared.

Hill: It very much appeared that way.

Barker: It appeared that way, until the lines were crossed.

Hill: Yeah. That didn't work out so well for the Stay Puft Marshmallow Man.

Barker: Do you want to explain any of that to those who haven't seen it?

Hill: For those who haven't seen the original Ghostbusters? I believe, in the original Ghostbusters -- spoiler alert -- the Stay Puft Marshmallow Man, at the end of the movie, I believe they wanted to get the Pillsbury doughboy, and Pillsbury said no. I think I read this, because we're just down the street from the U.S. Patent and Trademark Office, and they've got a museum there, and I believe I read that in the museum. But I'm not 100% sure on that. But I'm pretty sure I'm right, that the filmmakers tried to get Pillsbury like, "Hey, would you let us blow up, I don't know, a 500-foot tall Pillsbury doughboy?" And Pillsbury was like, "No, we don't want to do that. We don't want a gigantic evil Pillsbury doughboy running amok over New York City, that's going to be bad for our brand." And maybe it would have been, or maybe it would have been a brilliant move on their part.

Barker: Right. "Well, we haven't finished selling you on the idea. The Pillsbury dough boy is going to be the embodiment of all evil and destruction that is brought forth from this hellbeing and embodied by the Pillsbury doughboy. Now what do you think?"

Hill: "Now can we do this?" [laughs]

Barker: It's still a no.

Hill: You know what? When you put it that way, then yeah, it probably makes sense.

Barker: Can I just mention one thing, getting back to the Rachael Ray Nutrish brand?

Hill: Sure.

Barker: I just want to mention that my daughter has a stuffed animal, an eagle ray, her favorite stuffed animal, which is named Raychel Ray.

Hill: What's an eagle ray?

Barker: It's like a manta ray.

Hill: Oh, OK. Did someone cross-pollinate an eagle with a manta ray?

Barker: I'm not the one that names animals. We just got this stuffed eagle ray. She chose it out when she was very young, and it was just called Eagle Ray for a while, or Ray. And I said, why don't we call it Raychel? Then it became Raychel Ray.

Hill: And it stuck.

Barker: Yeah.

Hill: Nice.

Barker: She's the only girl in America whose favorite stuffed animal is an aquatic killer. [laughs]

Hill: Alright, the story that I mentioned at the top, that, as soon as this news broke, there were people on Twitter hitting me up and emailing saying, "You're going to get Bill Barker in the studio and talk about the coffee thing, aren't you?" And yes, of course we are!

Barker: They wanted my legal insights, right?

Hill: Believe me, of the two of us, you're the one who comes closest to actually being a lawyer.

Barker: Very close.

Hill: [laughs] We're going to get your legal insights. For those who haven't heard, this was about a week ago, that a California judge ruled that coffee sellers in the state of California had to include a cancer warning label on the coffee. And the National Coffee Association, which is really doing God's work -- their members include, obviously, the likes of Starbucks and Dunkin Donuts and others -- are exploring the proverbial "all legal options" to fight this.

I'm not even sure where to begin here. I mean, as both someone who went to law school, served as a lawyer for a bunch of years, and one of the most pro-coffee people I know, when you saw this story, did you think, "OK, this isn't going to hold up"? Or did you think, "I would actually be a little bit worried if I were Starbucks, Dunkin Donuts, and the rest"?

Barker: I don't know how to answer that yet, but here's what happened, at least from what I can tell, because I haven't had a chance to read the judge's actual ruling. But, many years ago, California came up with Prop whatever-it-was, I want to say 62 because I want to make up a number, and determined that there were a whole bunch of chemicals that could be found in foods and liquids that are served, and that if they were present, these are potentially cancerous, and you would have to at least provide a warning. And acrylamide is one of the things that is in coffee. It's not in dispute that it's in coffee. It's produced in the roasting process. There's very, very, very, very, very, very, very little, and the lawyers would add 12 more very's to that, and that wouldn't help them win the case. It didn't help in this case. It's there.

And I don't know -- again, because I haven't had a chance to read the ruling -- where the legal burden lies. But, from what I read, it appears that the judge determined that it's a given that acrylamide is a cancerous agent, and it's on this list, and it's in coffee, and you, the coffee industry or whoever was the actual defendant in this case, have not proven that coffee does not have a sufficient amount of it for there to be a cancer concern, and therefore you have to follow the law and provide a warning when you are serving it.

And that's not normally where the burden of proof lies, so I don't want to say that I'm providing all the legal niceties here. But, at any rate, I think that either the law could be revisited, or upon review, there could be a pursuit that the law is being misapplied here, given the remote amounts that are present in coffee. But, we'll see.

In the meantime, of course, the companies that serve coffee in the state could protect themselves, as they do already -- the last time that I was in California and got coffee, I believe I took a picture of the warning, and this was years ago, maybe four or five years ago was the last time I had the opportunity to be there, and there were warnings about some aspect of the coffee that I was being served at Starbucks. And I think it took a picture of it and may have sent it to you. Like, "Here's the craziness that is going on in California." And that was years ago.

Hill: I mean, pretty much all of the email that you send me goes straight to my spam folder.

Barker: Right.

Hill: By the way, well done on Prop 62, you were close. It was Proposition 65. So, you were in the ballpark in terms of which proposition.

Barker: I was hoping I was further off, because I was going for more of a comedic take there. I didn't think anybody was going to fact-check me. [laughs] I'm always hoping nobody's going to fact-check me on the show.

Hill: For that one listener in California, who just, when he or she heard you say Prop 62, they instantly were like, "Come on, it's Prop 65! Everybody knows that."

Barker: So, I was listening to the PTI show that you recommended to me.

Hill: Pardon the Interruption?

Barker: Well, the origins podcast on it.

Hill: Oh yeah, yes.

Barker: And I was reminded about the fact checker that they have on their show. Have you ever thought about having that?

Hill: Stat Boy?

Barker: Stat Boy, at the end of the show, to chime in? Who do you think would suffer the most from that?

Hill: The listeners would suffer the most for that, without question. Speaking of taxes.

Barker: Speaking of taxes.

Hill: This is a little-known anniversary in Fool history. It's so little known, I didn't know about it until you reminded me of it. You sent me an article. This is, what, the 11-year anniversary of one of the more ... insert your adjective here --

Barker: One of the least-celebrated articles I ever wrote.

Hill: Let's go with that.

Barker: Which is why the anniversary is not particularly well-known.

Hill: Right. But it does relate to taxes, and it is a killer headline.

Barker: So, the reason this came up is that yesterday, the Planet Money podcast rebroadcast an episode on ...

Hill: Larry Williams.

Barker: Larry Williams. And once upon a time, I wrote an article called The Ultimate Buy Signal.

Hill: By the way, who's not clicking on that headline?

Barker: That's why I wrote it. [laughs] It was one of these things I participated in, come up with a good headline and then find something worthwhile to say beneath the good headline. So, I did that. The Ultimate Buy Signal, in part, discussed something that I found in researching that phrase, ultimate buy signal, which is the ultimate oscillator, which was developed by Larry Williams, who is better known for having tried to get out of paying taxes for quite a while. And this Planet Money episode went into that. You can go and listen to Planet Money from yesterday and find out the whole story there.

Hill: I would argue that Larry Williams is, at this point in time, better known for being the father of Michelle Williams, the award-winning actress.

Barker: You could argue that, or you could argue that he's better known for having run twice for senator from the great state of Montana and having once gotten 44% of the vote. Or, you might argue that he's better known for having searched for Noah's Ark. I don't know what you would do. He's led a rich life.

Hill: There's a lot going on there.

Barker: There's a lot going on there. I recommend the podcast. And interestingly enough, I wrote this article and it appears as one of the sources of information on the Wikipedia page about the ultimate oscillator today, which is fun to discover in going back and looking over your work from 11 years ago.

Hill: So, we were chatting about this earlier, and you pointed out something that I was unaware of. I'm familiar with the phrase, and probably a bunch of people are familiar with the phrase, ignorance of the law is no excuse. But as you pointed out, when it comes to the world of taxes, ignorance of taxes can sometimes be a pretty good excuse.

Barker: Well, it's no excuse not to pay them. But it's an excuse not to be imprisoned for not understanding your obligation to pay the taxes. And I would say that he had some pretty good lawyering to get him out of -- he just determined, and you can listen to the story as to how he determined this might be the case, that he had no obligation to pay federal income taxes at all. And I think everybody is aware, or should be, that they have to pay their taxes, which is one of the reasons why TurboTax is the sponsor today, is reminding people of that obligation, which is coming up. But, the tax code is detailed enough that, whereas if you, for instance, murder somebody, you don't get to say, "I was unaware that murder was illegal," or, "I was unaware that I'm not allowed to drive drunk." Right? Just, too bad, your lack of knowledge about the law is not something that gets you out of serving jail time for breaking it.

But it does help in determining whether you have criminally broken the tax laws when you fail to pay taxes, because it is a very complicated tax code that we have, and nobody can know everything there, and if they fail to pay their tax or part of their taxes because they're ignorant of some obligation in the tax code, that does help. That can be a defense in not serving jail time.

Hill: I like that you gave a plug for Planet Money, because if there's one thing Planet Money needs, it's promotion from us. [laughs]

Barker: [laughs] Before we came in here, Bill Mann was cutting a little spot for Marketplace, so we kind of owe them.

Hill: He was he was taping an interview for Marketplace Weekend. By the way, no, those are different entities. Marketplace and Planet Money are completely separate.

Barker: But they're aware that we confuse all of them. Anything that is on NPR and APR and PRI.

Hill: It's all the public radio.

Barker: It's all This American Life, NPR Marketplace. The whole thing.

Hill: Exactly.

Barker: They're all good friends with each other. [laughs]

Hill: [laughs] Right. Yeah, it's a big love-in between all the public radio entities. They're not in competition with each other at all. Here's something I'll give a plug to, which is, this weekend on Motley Fool Money, our guest is Charles Duhigg, best-selling author, Pulitzer Prize winning reporter. I taped an interview with him this morning. Such a smart guy, and always great to get insights from him. That's this weekend. Bill Barker from Motley Fool Asset Management, thanks for being here!

Barker: I feel like the one thing we failed to do was plug how healthy coffee is for you. That people wanted to hear that, perhaps, again, from us. Just be reassured that, despite this little blip from California, the vast body of evidence continues to show that the healthiest thing you can do, beyond eating, beyond sleeping, beyond meditating, beyond really anything, is to drink coffee all day long.

Hill: My reaction when I saw the news break, it actually was, "Ah, this isn't going to last." Because coffee is so incredibly healthy, it is backed up by so much science, there's no way this ruling by the California judge doesn't get overturned. I mean, it's just nonsense.

Barker: Yeah. Big Coffee is coming.

Hill: As it should.

Barker: As it should.

Hill: I mean, you might as well say big healthy insights for every living human being is coming, because that's what's coming.

Barker: Yeah.

Hill: Kind of like [...].

Barker: Coffee is the healthiest vegetable out there.

Hill: I think that's probably true.

Barker: Whether it's a vegetable or not -- it's not.

Hill: It's not?

Barker: It's a bean, right?

Hill: Aren't beans vegetables?

Barker: Are they legumes?

Hill: Well, green beans are vegetables.

Barker: I don't know. Coffee should be categorized as a vegetable, although, it should be categorized as a meat in terms of its deliciousness.

Hill: To go back to your comment about Pardon the Interruption, if we had a Stat Boy on this show, we'd have to give that person a good, solid 10 minutes at the end of the show just to correct everything we're getting wrong. Thanks for being there!

Barker: Thank you!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Heather Horton. I'm Chris Hill. Thanks for listening! We'll see you next week!

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Bill Barker owns shares of Alphabet (C shares). Chris Hill owns shares of Starbucks. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Netflix, Starbucks, and Twitter. The Motley Fool owns shares of Square. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.