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Based in Parsippany, NJ, Pinnacle Foods (PF) scheduled a $551 million IPO with a market capitalization of $2.15 billion at a price range mid-point of $19 for March 28, 2013.

Four IPOs are scheduled for the week of March 25th. The full IPO calendar is available here.

Manager, Joint Managers: Barclays; BofA Merrill Lynch; Credit Suisse; Goldman; Morgan Stanley; UBS.
Co Managers: Blackstone Capital; BMO Capital; C.L. King; Janney Montgomery Scott; Macquarie Capital; Piper Jaffray; Stephens; Stifel.

S-1 filed March 15, 2013.

SUMMARY AND OBSERVATIONS
PF has three divisions: Birds Eye Frozen Foods, Duncan Hines Grocery, and Specialty Foods. Sales for the last three years have been flat, in the $2.4 billion plus range.

Gross profit is down 5% for 2012 vs 2011, but adjusted net profit was up to $113 million from $60 million. Adjusted free cash flow increased to $186 million from $95 million.

PF intends to pay a 3.8% dividend at the price range mid-point of $19. The intended dividend is 44% of pro forma adjusted free cash flow for 2012. On a relative basis that's a fairly high dividend: 86 percent of the companies in the Standard & Poor's 500 Index paying dividends pay a yield 3.7% or lower.

For segment comparisons we are using WhiteWave (WWAV), J.M. Smucker (SJM) and General Mills (GIS). The segment is up 10-14% in the past month. Observations include:

  • PF is priced at price/sales and price/book value discount to the segment companies.
  • PF has the highest dividend payout ratio.
  • PF is a comparable P/E range.

COMPARE

lowest

lowest

in range

lowest

highest

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

Dividend

yr ended Dec 2012

Cap (MM)

Sales

Earnings

BookValue

TangibleBV

%

Pinnacle Foods

$2,147

0.9

40.5

1.5

37.3

3.80%

PF adjusted P/E

19.0

General Mills

$29,900

1.7

16.5

4.3

-4.5

2.85%

J.M. Smucker

$13,330

4.6

25.7

10.1

86.6

2.14%

WhiteWave

$3,010

1.1

15.7

3.8

-0.6

none

Glossary

Other observations include:

  • $60 mm in post-tax pro forma savings, 2012.
  • Pro forma dividends are 44% of adjusted free cash flow.
  • Cash flow benefits of a big brand: low R&D % of revenue; low capital expenditures as a % of revenue.

CONCLUSION
PF probably won't be a barn-burner but should edge up. And PF allocations probably will tighten up as the IPO date nears.

BUSINESS
PF has three divisions: Birds Eye Frozen Foods, Duncan Hines Grocery, and Specialty Foods.

PF's Leadership Brands are comprised of Birds Eye, Birds Eye Voila!, Duncan Hines, Vlasic, Van de Kamp's, Mrs. Paul's, Mrs. Butterworth's and Log Cabin.

Historically, the Leadership Brands received 80% of the marketing investment and the majority of innovation investment.

Birds Eye and Birds Eye Voila! brands combined have annual retail revenue across all retail channels in excess of $1 billion, and the remaining Leadership Brands collectively have annual retail revenue of approximately $900 million across all retail channels.

In fiscal 2012, PF's Leadership Brands accounted for 55% and 70% of consolidated net sales and gross profit, respectively, and 65% and 74% of North American Retail net sales and gross profit, respectively.

PF's well-recognized brand portfolio enjoys strong household penetration in the United States, where PF products can be found in over 85% of U.S. households. PF brands are leaders in their respective categories, holding the #1 or #2 market share position in 10 of the 12 major product categories in which we compete.

PF says it has $1 billion in net operating losses and other tax attributes, which PF believes will result in minimal cash taxes through 2015 and modest annual cash tax savings beyond 2015.

PF says its well-maintained manufacturing facilities and strategic use of co-packers limit capital expenditure requirements, and ongoing focused management of working capital also benefits free cash flow.

BLACKSTONE
$3.0 billion of debt was incurred in connection with the acquisition of the PF by affiliates of The Blackstone Group L.P. in April 2007 and the Birds Eye Acquisition in December 2009. Since then PF has paid down $350 million of that debt.

BIRDS EYE PURCHASE PRICE
At the closing of the Birds Eye Acquisition on December 23, 2009, Pinnacle Foods Group LLC purchased all of the outstanding shares of Birds Eye's common stock, par value $0.01 per share, for $670.0 million in cash, together with the assumption of Birds Eye's debt of $670.4 million, resulting in the total acquisition cost of $1,340.4 million.

CONSUMER BUYING PATTERNS
The industry has experienced volatility in overall commodity prices over the past five years. To date the industry has managed this commodity inflation by increasing retail prices, which has affected consumer buying patterns and led to lower volumes, particularly in the frozen categories.

The overall food industry continues to face top line challenges. Problems include overall volume softness and a more challenging economic environment, making it difficult to pass on price increases (driven by cost increases).

INDUSTRY TRENDS
Growth in the industry is driven primarily by population growth, changes in product selling prices and changes in consumption between out-of-home and in-home eating. With the slow economic recovery since the recession in 2008 and 2009, consumers are looking for value alternatives, which has caused an increase in the percentage of products sold on promotion and a shift from traditional retail grocery to mass merchandisers, club stores and the dollar store channel.

PF believes it is well positioned in grocery and alternative channels, maintaining strong customer relationships across key retailers in each segment.

Longer term trends
Over the long term, the share of food consumed at restaurants and in other food service venues had been increasing, with the share of food consumed at home in decline. During the 2008-09 recession, this trend reversed, with consumers eating more at home. Recently, the industry has experienced a decline in the volume of food consumed at home, yet away from home eating venues have not experienced corresponding volume increases.

During 2012 the industry shifted investment spending to trade promotions during a period of heightened competitive activity and significant consumer price sensitivity.

CUSTOMER CONCENTRATION
Wal-Mart and its affiliates are PF's largest customers and represented 25% of net sales in each of the fiscal years 2012, 2011 and 2010, respectively. Cumulatively, including Wal-Mart and the top ten customers accounted for 60% of net sales in fiscal year 2012, 60% of net sales in fiscal year 2011 and 61% of net sales in fiscal year 2010.

SEASONALITY
Sales and cash flows are affected by seasonal cyclicality. Sales of frozen foods, including frozen vegetables and frozen complete bagged meals, tend to be marginally higher during the winter months.

Seafood sales peak during Lent, in advance of the Easter holiday. Sales of pickles, relishes, barbecue sauces, potato chips and salad dressings tend to be higher in the spring and summer months, and demand for Duncan Hines products, Birds Eye vegetables and pie and pastry fruit fillings tend to be higher around the Easter, Thanksgiving, and Christmas holidays.

Since many of the raw materials processed under the Birds Eye, Vlasic, Comstock and Wilderness brands are agricultural crops, production of these products is predominantly seasonal, occurring during and immediately following the purchase of such crops.

PF also increases its Duncan Hines inventories in advance of the peak fall selling season. As a result, inventory levels tend to be higher during August, September and October, and PF requires more working capital during these months. PF is a seasonal net user of cash in the third quarter of the calendar year.

DIVIDEND POLICY
PF intends to pay a regular quarterly cash dividend of $0.18 per share on the common stock, which is 3.8% annualized at the price range mid-point of $19: yearly dividend would total $113 million.

PUBLIC SEGMENT COMPETITION
WhiteWave
J.M. Smucker
General Mills

PRE-IPO STOCHOLDER
Blackstone (BX) owns 95% of PF pre-IPO.

CASH FLOWS
Unadjusted net cash provided by operating activities was $202.9 million for the fiscal year ended December 30, 2012.

Net cash provided by operating activities was $204.2 million for the fiscal year ended December 25, 2011.

Net cash provided by operating activities was $257.0 million for fiscal 2010.

USE OF PROCEEDS
PF expects to net $521 million from its IPO. Proceeds are allocated as follows:

Redeem $465 million in 9.25% Senior Notes due April 1, 2015.

Balance together with cash on hand, to repay $86 million of the Tranche B Non-Extended Term Loans. As of December 30, 2012, Borrowings under the Tranche B Non-Extended Term Loans had a weighted average interest rate of 2.74% for the fiscal year ended December 30, 2012.

Note: PF also has $400 million in 8.25% notes due 2017. Over time PF could do a secondary to repay that 8.25% debt, or pay it down from free cash flow.

Disclaimer: This PF IPO report is based on a reading and analysis of PF's S-1 filing which can be found here and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Source: IPO Preview: Pinnacle Foods