Potential sale: 45% Upside (at $102)
This is an interesting but rather speculative buyout setup which could result in 30%-50% upside to the current prices.
Last week, the Financial Times reported that hot dog band owner Nathan’s Famous (NATH) is in talks for a potential sale. The details are limited, but it was mentioned that “major food manufacturers and PE firms” are among potential buyers.
Such rumors do not seem to be completely out of the blue. NATH is run by a prominent New York businessman Howard Lorber, who also owns 24% of the company. He’s 76 years old and appears to be in the process of planning his estate. Last year, he was hit with sexual misconduct allegations. Then, in the summer, he sold his main company Vector Group for $2.4bn, personally netting around $120m. At the end of October, he stepped down from the executive chairman position at Douglas Elliman, the New York’s largest real estate brokerage firm. Selling Nathan’s would be a fitting final move, especially since Lorber’s stake ($100m+) constitutes a significant part of his net worth.
While Nathan Famous originated with the iconic Coney Island hot dog stand, today the real money-maker isn’t the restaurant business but rather its licensing operations—branding Nathan’s hot dog packages for supermarkets and collecting royalty fees at nearly 100% margins. With all product manufacturing fully outsourced to third parties, Nathan’s Famous is a high-margin, asset-light business. Even its restaurant operations are mostly franchised, with only four company-owned locations vs 240 total.
NATH business is split into 3 segments:
- Product Licensing – NATH licenses its name to food processors, which produce, package and sell Nathan’s branded products (hotdogs, spices, fries, pickles, bagels, etc.) to retail grocery channels. In return, NATH collects 10.8% net sales royalty fees. This segment has been growing steadily at 8%+ for the past six years and now makes up most of the company’s earnings. Meat processor and distributor Smithfield Foods accounts for 90% of segment’s revenues, with the licensing agreement (for hot dogs/sausages) signed in 2014 and expiring in 2032.
- Branded Product Program – NATH sells products to food distributors, which then resell to food service industry in event places such as stadiums, airports, schools, etc. All manufacturing outsourced, mostly to Smithfield Foods. Revenues in this segment come at a 9-11% EBIT margin, similar to royalties received in licensing operations.
- Restaurants – 240 locations almost fully franchised. Yet again Smithfield Foods is the key supplier to Nathan’s restaurant system. The profitability of the segment has been hovering just above breakeven for years. While restaurant operations might still carry some importance for brand visibility and value, this likely pales in comparison to marketing boost that comes from Smithfield’s side.
Smithfield Foods (SFD) is easily best-positioned to acquire NATH and is probably the “major food manufacturer” that the Financial Times article referred to. SFD has been Nathan’s key business partner for over a decade—as described above, Smithfield is the main licensing partner responsible for 90% of royalties in the licensing segment. It also manufactures all of Nathan’s hot dogs, which are then supplied across NATH’s other two segments. In a way, Smithfield is already running most of Nathan’s operations.
This is how the relationship is described in NATH’s 10-K:
“We expect that our retail licensing program may continue to grow, centered around our licensing program with Smithfield Foods, Inc. Smithfield Foods, Inc. brings superior sales and marketing resources to our brand through its national scale, broad distribution platform, strong retail relationships and research and development infrastructure capable of developing and introducing new products. As a result of our partnership with Smithfield Foods, Inc., we expect Nathan’s Famous products to continue penetrating the grocery, mass merchandising and club channels by expanding points of distribution in targeted, underpenetrated regions and through the development of new products. We believe Smithfield Foods, Inc. expects to continue to leverage this relationship with continued full-scale marketing efforts, both inside and outside of stores, highlighted by exciting customer events and brand representation and support of our Nathan’s Famous Hot Dog Eating Contests.”
A buyout would make strong strategic sense and could unlock significant cost synergies. The buyer could immediately eliminate a large part of NATH’s overheads by fully absorbing the licensing and branded product segments into its existing Packaged Meats business.
Besides the synergies, there are several more reasons to think that Smithfield should be interested in a takeover:
- Smithfield has a long history of acquiring brands. Originally a farming and pork production company, SFD pivoted 45 years ago into branded consumer products, using its own pork for production. Its most recent acquisition was Farmer John in 2017 for $145 million. Today, SFD owns 14 brands—two proprietary, eleven acquired over the years, and Nathan’s, the only licensed brand in its portfolio.
- SFD already considers Nathan’s as one of its 3 core brands. This point is highlighted everywhere in SFD’s corporate filings. So it seems that the Smithfield is quite happy with the brand and the value that the licensing agreement generates. Notably, NATH’s current licensing revenue run at 2x the minimum royalty thresholds (page 8) suggesting that the partnership is likely outperforming initial expectations.
- Smithfield IPO’ed just three weeks ago. One of the stated goals was “Synergistic M&A in North America.” It seems that acquiring Nathan’s would be a perfect way to kick-off the new chapter as a public company and immediately prove that it can pull-off highly synergistic deals.
- While the IPO has provided SFD with an additional currency to fund the transaction, the potential suitor doesn’t necessarily need it. Smithfield has a strong balance sheet with just 1.4x net leverage. Even if it paid a 50% premium and bought Nathan’s entirely in cash, net leverage would rise to only 1.9x – still below its 2x target.
How high could the bids for NATH go? Let’s look at it from a sum of the parts perspective.
In the eyes of Smithfield, both licensing and branded products segments are probably viewed very similarly, i.e. by acquiring Nathan’s operations Smithfield would earn extra 10-12% for the products it is already producing and supplying to the company. It does not really matter whether these will come in the form of eliminated royalties in the licensing segment or extra revenues/EBIT for the branded products segment. The benefit might be even larger if Smithfield is able to squeeze out any revenue/cost synergies on the branded products side. The two segments did $45m in combined operating income on TTM basis. These zero-extra-effort earnings (Smithfield already does 99% of the work anyways) should carry a relatively high multiple, say 15x.
The restaurant segment operates just slightly above breakeven and is subscale. It is probably not worth much. This business also does not fit into existing Smithfield structure. However, Nathan’s franchised restaurant operations are very stable and still generate $4m+ in annual royalties and contribute $2m to advertising fund. At the very least, I do not think the restaurant segment should carry a negative value.
Almost half of NATH’s unallocated corporate overheads come from the compensation of named executives and board members, for a combined total $4.3m in fiscal 2024. I assume Smithfield could easily eliminate these. I capitalize the remaining $4m of corporate overheads at 10x.
All of this results in SOTP equity value of $604m or $148/share. That is 45% above the current trading levels.
This valuation estimate is most sensitive to the 15x multiple on the earnings of licensing and branded products businesses. Unfortunately, I do not have a strong support for this figure and this multiple is a bit of an educated guess on my side. But even if we reduce this multiple to 10x (which would already be a very pessimistic scenario), sum of the parts would decline to $92/share, just slightly below the current levels.
That pretty much outlines the whole case for the potential buyout of NATH. The setup is still in the rumors stage, but everything about it just seems to fit—Nathan’s chairman and largest shareholder has a clear motive to sell, while Smithfield has solid incentives, the track record, and means to buy.
The biggest risk is that the buyout doesn’t happen. All we have now is just rumors. If that just fizzles out, the downside to pre-announcement levels is 13%-20%. The next earnings report (fiscal 2025) should be out only in June. There is also a possibility that Smithfield doesn’t bid and Nathan’s is instead sold to a PE firm. While there’s some risk related to SFD’s contract down the line, both parties seem happy with the arrangement so far. Regardless, a PE buyer would likely be able to pay a lower multiple than what SFD could due to the contract risk and lower expected synergies.
Another thing to note is that Gabelli Funds has been selling some shares lately – went from 14.75% in mid-2024 to 12.75% this month. Gabelli was selling even on February 13 (after the rumor spike) at $95/share. The amount was very low, so maybe it doesn’t mean much.
To give credit where it’s due: I probably would have skipped NATH entirely after just seeing the FT report if it were not for Vince Martin’s very timely write-up, which he published just a couple of days before the rumors surfaced.
NATH often pops up on quality-factor screeners. I have looked at it in the past but always held off because it just doesn’t trade much. For example, today’s volume is just 9,500 shares…that’s less than $1mm changing hands.
Thomas – do you mind if I ask what screening tool you use? I would love to find a screening tool that incorporates factors like quality, momentum, etc.
I use Stock Rover. Fantastic database of fundamental measures and you can write your own screening equations, etc. Not too expensive for the premium product (I think like $275 per year). Downside is that it only handles US and Canadian stocks plus ADRs.
I recommend the book Your Complete Guide to Factor-Based Investing by Swedroe and Berkin to give an overview of factors you might incorporate in your screeners. Also, lots of papers and articles by AQR people (check their website).
Very much appreciated! Thank you!
Thanks for sharing, nice write-up. How do you think about the risk of a lowball offer from Smithfield? They’re the main distributor, so potentially have significant leverage over the relationship, right?
That’s definitely a risk, but I don’t think NATH’s management would settle for a lowball price. It is quite likely that these talks (assuming the rumors are legit) were leaked by NATH itself, in order to make the whole thing public and attract other interested parties
As freshly public company, Smithfield is likely very eager to show growth to investors and NATH’s acquisition seems to be easiest option for that (any integration should be trivial, with $40m+ in operating earnings flowing directly to the bottom line). So there is some negotiating leverage in NATH hands as well.
Playing devil’s advocate here: There is also some geopolitical risk, with a Chinese controlled company Smithfield acquiring an iconic American brand Nathan’s Famous (and a quintessential American symbol: hot dogs!).
I get what you are implying, but I think Smithfield is as American as Nathan’s and I do not think regulators would look at it differently. It was founded almost 100 years ago in Virginia and today operates 39 meat processing facilities in U.S. Smithfields was indeed acquired by Chinese conglomerate WH Group in 2013, but the recent spin-off and listing in US puts it again back (at least partially) in American hands. All execs are non-Chinese and 4 of 9 directors are also non-Chinese.
Couple this with the fact that Smithfield is already doing most of the actual production when it comes to the ‘American symbol: hot dogs’, and there are hardly any arguments left for reg interference.
On the bright side, WH’s decision to re-list Smithfield on the US market again could be driven by the desire to relieve regulatory concerns and facilitate U.S. M&As.
SFD raised relatively little capital from the IPO, selling only 7% shares, and WH still controls nearly 93%. So raising money was not as important an incentive for its IPO.
There’s a silver lining the the tariff war. Smithfield’s export business to China or other countries could be negatively affected, so acquiring a purely domestic business like Nathan’s to derisk trade exposures makes perfect sense.
However, I notice that SFD stock price has been quite stable lately, which doesn’t bear out my assumption that SFD is significantly exposed to tariff risks.
Only started dipping my toes in here but I think this news is pretty bad for the thesis.
https://www.bloomberg.com/news/articles/2025-04-02/china-restricts-companies-from-investing-in-us-as-tensions-rise?srnd=phx-markets
I can’t access the full article. Could you elaborate on why this is bad?
As snowball pointed out Smithfield is Chinese controlled.
“Several branches of China’s top economic planning agency, the National Development and Reform Commission, have been instructed in recent weeks to hold off on registration and approval for firms that are looking to invest in the US, the people said, asking not to be identified discussing sensitive issues.”
Could impact Smithfield’s ability to finance a takeover/receive shareholder approval?
It depends if Smithfield is regarded as Chinese or US company in the eyes of Chinese regulators.
Also, Smithfield has ample of cash to buyout NATH and would not need any additional funding from Chinese parent to do that.
But I agree that this is an additional risk factor. I guess we will be seeing new developments on US/China relationship on a daily basis going forward.
How should we set up exit rules for this kind of situations (fundamental value play + media rumor + attractiveness of the target to the rumored acquirer )?
Time-based exit rules (i.e., exit if no further news or positive development after three months)?
I don’t think there are any hard rules that apply here – it really depends on the case. Personally, I try to exit when the underlying thesis has changed. In my experience, holding on after the thesis shifts often leads to worse outcomes than just cutting the position outright.
That said, some kind of time-based rule can be useful – especially when a rumor has been sitting around for a long time without any confirmation (say, a year or more). In the case of NATH, it’s been less than two months since the media reports, so I’d still consider it pretty fresh.
NATH reached as high as $115.6 on 06/10.
Nearly three months have passed since the FT rumor.
Is 3-months a good time-based exit rule for rumored deals that go silent?
Not sure about the timeline, but I guess catalyst uncertainty or delay seems more tolerable when the underlying business is performing well (as it seems to be here).
NATH came back down to $96, nine months after the FT rumor was published. I guess the deal is dead.
$105, down 9%, no news.
Correct. Consistent with what others’ brokerages indicate. With tiny volume and a gaping bid/ask spread you could more easily drive the price back up or drive it down another 9% with any significant trade than you could get actionable answers for why a stock moves as it does at a given moment.
I think NATH is not too illiquid. Average daily $volume is about $5m and bid/ask spread is 7% of free float) on Jul 14, the day before the 9% fall.
Smithfield offers $102. (exact same price as when this idea was published on 2-25-25.) Price now $101, so the market thinks low chance of a higher offer. Any comments?
There has been dividends of $4/share (including the special dividend of $3) since then. So a small profit.
This is basically a manufacturer acquiring its brand licensor to eliminate royalty payments. 30% of shares are in support (simple majority needed), given the 12.4x EBITDA multiple (could drop to 10x post-synergies), seems like this will go through.
So the sale did occur, but at a much lower price than expected. Howard Lorber and management together own 30% of the company and support the transaction. It’s likely it will go through. I’m removing this from the active ideas list, with a small ~3% return driven by dividends paid over the last year.