Darling Ingredients Forges Collagen JV with Tessenderlo, Targeting Growth Amid Persistent Financial Strains

What happened

Darling Ingredients has signed a definitive agreement with Tessenderlo Group to merge their collagen and gelatin segments into a new, independent company focused on health, wellness, and nutrition products. This joint venture requires no upfront cash or investment, aiming to create a top-tier player in the growing global collagen market, which Darling already participates in through its Food Ingredients segment. DeepValue's report highlights that this segment has faced margin pressure from lower collagen prices and inventory issues, contributing to earnings volatility and a HOLD rating due to elevated leverage and rich valuation. The company's overall financial health remains precarious, with a Net Debt/EBITDA ratio of 4.16x and sensitivity to policy-driven fuel credits and feedstock spreads in its Diamond Green Diesel joint venture. While this move strategically targets a stable niche, it does not immediately address Darling's core risks, such as balance sheet traction and renewable fuels execution, which are critical for any investment upgrade.

Implication

Investors should view this partnership as a positive step to bolster Darling's collagen business, which aligns with long-term health trends and may offer more predictable cash flows compared to its fuel segment. However, with no cash outlay, the immediate financial impact is neutral, avoiding further strain on an already leveraged balance sheet that has a Net Debt/EBITDA of 4.16x and interest coverage of only 1.24x. The success of this venture depends on effective integration and market execution, areas where Darling has historically faced challenges, such as past inventory adjustments in Food Ingredients. Crucially, this development does not address the key watch items from DeepValue's analysis, including the need for deleveraging, improved SAF ramp-up at Port Arthur, and stability in LCFS/RIN credit spreads. Therefore, while it supports medium-term resilience, investors must remain cautious as the stock's rich valuation (P/E 47x) and core earnings drivers remain exposed to high volatility and external policy risks.

Thesis delta

The formation of this collagen-focused joint venture introduces a potential catalyst for growth in Darling's Food Ingredients segment, aligning with secular demand in health and wellness. However, it does not materially shift the core HOLD thesis, as the company's elevated financial leverage, earnings volatility from fuel credits, and execution risks in renewable fuels remain unchanged. Investors should monitor this JV's progress but not expect a rating upgrade without concurrent improvements in balance sheet metrics and key operational watch items.