Is Pirate Brands A Game Changer For B&G?

Jun.12.13 | About: B&G Foods, (BGS)

In an article published less than three weeks ago about B&G Foods (NYSE:BGS) raising capital through a new debt issue, I wrote:

And, considering that CEO David Wenner now has an extra $148.6 million dollars burning a hole in his pocket, investors should expect another acquisition to take place sooner rather than later.

"Sooner" occurred on Monday of this week when B&G announced that it had:

...entered into an agreement to acquire Robert's American Gourmet Food, LLC dba Pirate Brands, a leader in the all-natural snack foods category, from VMG Partners, Driven Capital Management, founder Robert Ehrlich and certain other entities and individuals, for approximately $195 million in cash.

During a conference call that discussed some of the highlights of the acquisition, which is expected to close next month, Wenner noted the following:

  • Annual net sales are expected to be $80-$90 million
  • Annual Adjusted EBITDA is expected to be $18-$20 million (after integration and achievement of full synergies are realized)
  • Growth has been "double digits the last few years"
  • Product suite uses co-packers (similar to much of B&G's current business model)
  • Acquisition also includes personnel and leased headquarters
  • Pirate's Booty brand represents 90% of sales
  • Mass merchants represent less than 10% of sales representing a significant opportunity

Wall Street has embraced the acquisition and as of this writing had pushed the share price up close to $32, almost 10% above the Friday closing price of $29.18. Some of the reasons are that the acquisition, like most of B&G's acquisitions, is expected to be immediately accretive to Adjusted EBITDA and Free Cash Flow (or FCF). The acquisition is also expected to increase adjusted, diluted EPS by $0.22.

Entry Into Snack Foods

This is B&G's third - and largest - acquisition in the snack food sector since September. At that time, B&G acquired the New York Style® and Old London® brands from Chipita America, Inc., a deal that included a manufacturing facility and a separate sales organization. And, last month, it acquired the TrueNorth Brand from privately held DeMet's Candy Company. Their revenue in the snack food sector is now expected to show net sales of $140-$150 million with adjusted EBITDA of $28-$30 million on an annualized basis. Wenner noted that:

Its size should allow us to build a more cost-effective infrastructure oriented towards the sale and distribution of snacks.

It will also require that the company merge sales organizations and integrate the G&A functions. There are, however, some very distinct differences between this acquisition and those made in the past. B&G typically acquires orphan brands from larger companies - brands that have been neglected and that have had declining sales. The company would introduce new methods of marketing, new flavors or new packaging for alternate distribution channels and invigorate sales.

This acquisition, as noted above, has experienced double digit growth the past few years. When discussing the implications, Wenner said:

We recognize that this strategy requires a different way of thinking about and managing brands, and we are building a team with an orientation towards growth and innovation to accomplish that.

Clearly, there are some risks with the change in focus and strategy. There are also some very sizable rewards. Wenner expects that the adjusted EBITDA will reach 22% of Net Sales in 2014, with 70% of that adjusted EBITDA turning into FCF.

A New Direction?

Is it a game changing acquisition? Wenner expressed his concerns about the current B&G business model:

Most importantly, I think, although our model has worked very, very well so far in terms of free cash flow and providing investors with a great yield on our dividend, I'm concerned that that model will not be as attractive going down the road if rates were to increase and yield expectations were to increase. And so, we're using a very, very strong base here to build a growth business and broaden our appeal as a stock as we go forward.

In the past, I have written about how shareholder friendly B&G has been. It has always believed in paying out a sizable dividend, and that is not about to change. Wenner continued:

We're not walking away from our metrics of free cash flow and returning a significant portion of that free cash flow to investors.

Nor will B&G be walking away from what has worked in the past. One can expect that the company will try to introduce new flavors and expand distribution to mass merchants where B&G has demonstrated success with stores such as Wal-Mart (NYSE:WMT).

The Dividend

I was first attracted to B&G's hybrid security for income. I remained a shareholder even after the note attached to the shares was called because the dividend remained attractive. It is still one of the highest yielding stocks in the food and snacks sector, and has often grown the dividend following accretive acquisitions.

Unfortunately - at least for investors looking for yield - the share price strength has now driven the yield below 4%. In the past, I had recommended the use of opening a position using covered calls as a way to boost income with a combination of call premiums and dividends. Now, even that alternative has lost its attraction.

I expect that B&G will once again increase its dividend before the end of the year, but the size of that dividend increase may be less than some investors would like. It appears that Wenner may choose to return value to shareholders more through share price appreciation rather than dividends. It's not that there is anything inherently wrong with such an approach, but it is a departure for those looking for dividends rather than capital appreciation.


B&G has made a sizable acquisition that has increased its leverage from the "mid-threes" to 4.3x. If history repeats itself, that leverage should be brought back down fairly quickly, although the company's frequent use of short-term debt to increase leverage may cause many investors to reject B&G as too risky. And, the recent increase in the share price has made the dividend (now below 3.7%) somewhat less attractive relative to its peers.

Wenner has prided himself on being shareholder friendly, and I expect that attitude to continue. I will continue to hold my current position, and wait to see how he manages integration of the recent snack foods acquisitions and the challenges of operating a growth business. However, if the rate of growth of the dividend and its yield continue to decline, I may reallocate funds to PepsiCo (NYSE:PEP), a much more dominant player in the snack foods sector.

Disclosure: I am long BGS, PEP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have $30 covered calls written against a portion of my position.