Spring 2023: Target and Ingredion

Recommendation for Target| Board of Directors

Discussion Materials | April 26th, 2023

Deal Team FIR

Brooke Vandermyde

From: Naperville, IL

Kelley School of Business|2026

Majors: Finance, Accounting

Aidan Sondell

From: Wayzata, MN

Kelley School of Business|2026

Major: Finance

I. Executive Summary

Executive Summary

Overview

Scope of Proposal

Strategic Assessment

• Target is a general merchandise retailer with a 1,948 stores throughout the US, representing a market share of 5.98%.

• Target is a popular brand in the retail industry, as 75% of Americans live within 10 miles of a Target store, showcasing their strong dominance and continued strength for the future.

• Target’s consistent and historic growth as well as its presence of making acquisitions positions itself very well to acquire other companies to expand their product segments

• This proposal covers specialty food ingredient market, specifically sustainable and plant-based options.

• Target’s position as a value-added merchandising retailer, along with its customers willing to spend more money on certain products, put it in a great position to acquire a leading ingredient solutions provider

• FIR uses its expertise in the industry to present the smartest possible investment to strengthen Target’s position as a market leader in the specialty food ingredient market.

Proposal

• Target’s strong position in the retail industry allow room for the acquisition of Ingredion company to expand its plant-based and sustainable options for its own general brands.

• Target has penetrated the plant-based market through the introduction of Good & Gather Plant-Based, which Ingredion would provide sustainable ingredients and stevia sweeteners for.

• Target’s Good & Gather Plant-Based, along with its other in-house products, allows for the natural transition for Ingredion to begin to produce better ingredient alternatives for Target’s customers.

Given Ingredion Incorporation’s market placement, the FIR recommends the acquisition of Ingredion Incorporation at an offer price of $133.50 per share at an implied equity offer price of $8,519 M.

II. Company Overview

Company Overview – Target (US) (NYSE: TGT)

• Target Corporation is a leading US general merchandising retailer that rose to $109 B in revenue in 2022 and is looking to grow by 13.3% in 2023.

• Target has seen significant growth in their in-house brands, most notably in the food and beverage sector (Market Pantry, Good & Gather, Favorite Day), along with clothing and beauty products.

• Specializes in a value-added approach, as customers shop because of the quality and assortment of products, while private labels generates higher profitability and separation from competitors.

• CEO Brian Cornell created Target Forward: a plan to be the market leader in sustainability in business and products.

• Notable acquisitions:

• Shipt: Created same-day delivery to customers, bringing efficiency to consumers. Dec 2017.

• Ingredient 1: Online food shopping platform based on ingredients, allergens, nutrition and certifications. August 2012.

• Ingredion Inc. is a leading American global ingredients company that specializes in innovative ingredient solutions to help customers stay on trend.

• Ingredion has become a Fortune 500 company through its aggressive horizontal acquisition strategy that it has incurred since its founding in 1906.

• Provides consumers with plant based and sustainable ingredient alternatives that aligns with consumer’s shift in values to make more sustainable and intentional purchases.

• Currently operating in mainly food, beverage, paper and corrugating, brewing industries which has seen the most profit overall.

• Notable acquisitions:

• KaTech: Expertise in product formulation, ingredient functionality, and technical assistance Apr. 2021.

• PureCircle Limited: Producer and innovator of plantbased stevia sweeteners July 2020.

Company Overview - Ingredion

Financial Summary (USD, in mm)

Total Revenue: 7,946.0

EBITDA: 983.0

EBIT: 768.0

Net Income: 492.0

Gross Profit Margin: 21.8%

Capital Expenditures: 300.0

Cash and ST Investments: 239.0

Total Debt: 2,677.0

Total Assets: 7,561.0

Total EV: 9,459.7

Stock Performance (NYSE: INGR)

Nov 2020: INGR announces acquisition of Verdient Foods, officially expanding into the plant-based food segment, a strong growth sector currently.

May 2021: INGR announces acquisition of KaTech, expanding its dominance in innovative ingredient solutions worldwide.

Feb 2023: INGR announces increase in dividends of 9% to $0.71/share, releases a strong annual report, resulting 6.2% increase in stock.

III. Industry Outlook

Industry Analysis

Specialty Food Ingredient Industry Market Size, Share, and Revenue

• The Specialty Food Ingredient Industry is valued at $148.2 B.

• North America holds the largest demand for specialty ingredients with a dominance of 32.6% of all consumers.

• Ingredion holds a market share of 13.58%, trailing Kerry Group and Cargill Incorporation.

Specialty Food Ingredient Industry Key Statistics

• The Specialty Food Ingredient Industry is expected to grow at a CAGR of 7.2%

• Market size is expected to increase to $192 B by 2028.

• Projected revenues are expected to hit $136.1 B by 2026.

Trends: Innovative Product Offerings Illicit More Specialty Foods

• Today’s consumers are more aware of label claims and ingredient lists, causing them to take proactive participation to enhance their health and fitness in everyday life.

• Sugar-free, reduced-fat, reduced sodium, and other functional benefits are catching consumer’s eyes and has created robust growth in the industry since 2020.

• In 2020, plant-based food sales shot up 27% to $7 B and continues to grow as companies provide more private label options for consumers to purchase.

Trends: Consumers Look to Make More Sustainable Purchases

• With a recent global shift to make companies more sustainable, consumers are looking for retailers that are showing commitment to changing ways.

• 82% of consumers want to see companies taking action to make more sustainable efforts overall, helping forge a symbiotic relationship between companies and consumers.

• Companies are choosing to combat this by eliminating plastic bags or charging for them, providing ESG reports, and gaining strategic advising to be more sustainable overall, which INGR has exceled at in the market.

VI. Strategic Recommendation

Strategic Recommendation

• Ingredion Incorporation (NYSE: INGR) is a leading ingredient solutions company that specializes in pioneering new starch and stevia sweeteners to provide more sustainable and healthy options for consumers.

Ingredion Incorporation

General Overview

• The company is generating revenue growth through an increase in consumers being more willing to spend on value-added foods that contain their ingredient solutions, including reduced fat and sugarfree options.

• Ingredion has grown significantly through acquisitions that provide specifications in niche markets.

• The company’s Board of Directors states that they project revenues to be up mid-double digits for full year 2023, alongside cash from operations to increase by $150 mm, signifying working capital increases.

Strategic Recommendation

Financial Highlights

2022 Total Revenue

$7.946 B

2022 Adjusted Operating Income

$113 M

Q4 EBITDA % Margin Q4 2022 Gross Profit

12.3% $290 M

Main Uses: Rapid Growth

Ingredion has grown under its 3 pillars:

1. Specialties Growth:

- Q4 and FY global specialties grew, texturizing +13%, sugar reduction +17%, plant-based protein +108%

2. Commercial Excellence:

- Dynamic pricing & product mix management supported $1.3 B of total mix pricing for FY 2022.

3. Operational Excellence:

- Expanded commodity risk coverage due to Ukraine exposure, upgraded coproduct contracts to reduce corn price volatility

1. Stevia Sweeteners & Sugar Reduction: Stevia sweeteners are a growing form of sugar substitute derived from the stevia plant. Its main uses are through beverages, dairy products, and bakery items.

2. Plant-Based Proteins: A meaningful food source of protein derived from plants; the industry is growing with strong demand year over year as consumers continue to seek the strong health benefits provided, along with the increase in sustainability.

3. Batters and Breading: A non-GMO, gluten-free version of consumer’s favorite bread through a variety of starches, hydrocolloids, and flour.

Strategic Recommendation

Innovation in Food Processing Demand: An increase in dietary shifts across the US that promote health-conscious diets surround Ingredion’s push for non-GMO and plant-based ingredients as consumers are increasingly scrutinizing nutrition labels.

Performance Catalysts

Sugar Reduction & Specialty Sweeteners: Stevia sweeteners are a low-calorie alternative to sugar that is beneficial for low-sugar diets. This has enabled food and beverage companies to be more sustainable with sugar mining reduction, which consumers prefer.

Consumer Behavior Changes: Ingredion’s main profit drivers have been from a strong shift in consumer trends that have driven

Synergies

Potential Concerns & Mitigations

Revenue Synergies: Target would be able to expand its in-house product lines through different types of ingredients offered by Ingredion, which would further diversify its product line and have a greater appeal to consumers, ultimately increasing its revenue. Target also has connections to products that it holds on its shelves, which could serve as new customers for Ingredion, thus an increase in revenue.

Cost Synergies: Target already has in-house brands that would benefit from increasing production capacity through an acquisition of Ingredion. Through this economies of scale, Target would be able to expand multiple product lines, but most importantly their Good & Gather Plant-Based brand which has grown significantly since its release in 2021. Furthermore, to avoid layoffs at Target, employees could be utilized through the adjustment of acquiring Ingredion.

• Target’s control over Ingredion may lessen its acquisitional power

• Target may not see a need to continue to grow Ingredion through acquisitions that expand its food processing product line.

• Customers may leave Ingredion because they disagree with a general merchandising retailer owning a large food processing company

• Target will keep Ingredion as a separate company but have its in-house products made with Ingredion’s ingredients.

VII. Valuation

Comparable Companies Analysis

Discounted Cash Flow

Discounted Cash Flow

Precedent Transactions Analysis

Football Field Analysis

FIR

VIII. Strategic Alternatives

Strategic Alternatives FIR

Strategic Alternatives FIR

• Prominent food processing company that specializes in revitalizing ingredients for dairy products

• 2nd largest market share in industry, most of revenue is from niche product lines in Europe

• Risks:

• Have not found solution for supply chain problems lingering from Covid-19 pandemic

• Not a strong enough US presence to make sense for Target’s store locations and target market due to being based in Ireland, listed on Dublin exchange

• Global leader in manufacturing and distributing spices, seasonings, condiments, and other flavoring products to retail spaces

• Strong brand recognition among consumers asserts it position as a dominant company in industry

• Risks:

• Such a large market share and product lines make it subject to fail SEC acquisition approval

• Not making strides to offer health-conscious options that is a growing consumer trend

• Largest plant-based meat substitute company through non-GMO techniques

• Extremely sustainable company which aligns with current consumer trends

• Risks:

• Limited to only expanding/bettering vegan meat product lines

• Has expanded to the food service industry instead of a retail-oriented approach, lessening Target’s synergies

IX. Appendix

Operating Model Assumptions

Operating Model – Income Statement & Balance Sheet

FIR

Operating Model – Cash Flow Statement

Operating Model – Supplementary Schedule

Target’s Financial Highlights