Why TreeHouse Foods Stock Is Soaring This Week

Key Points

• Private equity firm Investindustrial acquired a large portion of TreeHouse Foods' meal preparation business in 2022.

• Now it may be coming back for seconds, with rumors circulating that it will offer $3 billion for the company.

• 10 stocks we like better than TreeHouse Foods ›

Shares of leading private-label snacking and beverages manufacturer TreeHouse Foods (NYSE: THS) rose 31% this week as of 2 p.m. ET on Friday, according to data provided by S&P Global Market Intelligence.

Octus, a global financial intelligence firm, learned that private equity firm Investindustrial was working on trying to acquire the beleaguered packaged foods company for $3 billion.

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This news sent shares rocketing higher, following the stock's decline from $40 to just $15 over the last year.

Image source: Getty Images.

Where there's smoke, there's fire?

While these types of M&A (mergers and acquisitions) updates are often speculative at best, there may be reason to believe in this potential bid.

In 2022, Investindustrial purchased a large portion of TreeHouse Foods' meal preparation business for $950 million. So there is a history between the two.

One possible scenario could be that Investindustrial saw success from its previous deal and is coming back for seconds with TreeHouse's stock cratering.

Now trading with an EV-to-EBITDA (enterprise value-to-earnings before interest, taxes, depreciation, and amortization) ratio of 8, TreeHouse is quite reasonably valued, even with its minimal growth rates.

Furthermore, the company is home to a portfolio of steady private label categories, such as baked snacks, tea and coffee, broth, hot cereal, powdered beverages, refrigerated dough, and pickles.

As private-label brands continue to grow market share in the consumer-packaged goods category -- and remain popular among Gen Z and millennial shoppers -- a well-priced buyout could make a lot of sense for InvestIndustrial.

For investors currently holding the stock, I would leave the arbitrage opportunity to the traders and move on from the debt-heavy, low-growth business. Its valuation is appealing, but it might be better off left to private equity to turn around.

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Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.