Pinnacle Foods: Expensive After Acquiring Wish-Bone

| About: Pinnacle Foods (PF)

Shares of Pinnacle Foods (NYSE:PF) saw a modest jump on Monday after the company announced the acquisition of the iconic Wish-Bone salad dressing business.

After a successful public offering I remain cautious. The current valuation is quite high on earnings multiples as Pinnacle operates with a relatively large debt position as well.

The Deal

Pinnacle Foods announced that it has entered into a definitive agreement to acquire the Wish-Bone salad dressing business from Unilever (NYSE:UN).

Pinnacle will pay $580 million for the leading salad dressing brand, which holds the #1 share position in the Italian segment of the relevant category. The portfolio includes liquid and dry-mix salad dressing flavors under the Wish-Bone and Western brand.

The activities have attractive margins and will boost Pinnacle's overall margins.

Pinnacle Foods expects that the acquired brands will add some $190 million in annual sales. As such, the deal values the activities at around 3.1 times annual revenues.

Pinnacle expects to realize $125 million in tax benefits on a net present value. Pinnacle expects to achieve substantial cost synergies by consolidating production facilities and other parts of the supply chain. Assuming cost synergies will be realized, EBITDA could run at $65 million per annum in 2015, valuing the deal at 8.9 times EBITDA.

The deal will be immediately accretive to Pinnacle's earnings. The deal is subject to normal closing conditions and is expected to be completed in the third or fourth quarter of this year.


Pinnacle Foods ended its first quarter with $132.1 million in cash and equivalents. The company operates with $2.59 billion in total debt for a net debt position of $2.46 billion. Pinnacle expects to finance the deal with cash at hand and new debt. Note that this debt position excludes the proceeds from the public offering.

For 2012, Pinnacle Foods generated annual revenues of $2.48 billion on which it net earned $52.5 million.

Trading around $26 per share, the market values Pinnacle at $3.1 billion. This values the company's operations at 1.25 times annual revenues and 60 times annual earnings.

Pinnacle Foods recently announced a quarterly dividend of $0.18 per share for an annual dividend yield of 2.7%.

Some Historical Perspective

Pinnacle Foods went public in April of this year. Shares were sold to the general public at $20 per share and have steadily advanced to highs of $26 per share.

Between 2009 and 2012, Pinnacle Foods increased its annual revenues by a cumulative 50% to $2.48 billion. Net income totaled just $52.5 million as the company suffers from a high debt load.


If we adjust the $580 million purchase price for the $125 million in tax benefits, the effective purchase price will be around $455 million. This values the activities at 2.4 times annual revenues and 7 times EBITDA estimated for 2015.

At the public offering of the firm, I took a look at the company's prospects. After factoring in the $580 million in gross proceeds from the public offering, which are used to repay senior notes which carry at 9.25% interest rate, net earnings could see a significant boost. As such, Pinnacle operates with a roughly $2.0 billion net debt position before the announced deal. Net income could be boosted toward $80 million on the back of reduced leverage.

Pro forma revenues, including the activities of Wish-Bone, could come in around $2.7 billion. This values Pinnacle's activities at 1.15 times annual revenues. As net earnings could approach the $100 million mark, the price earnings ratio comes in around 30.

I'm surprised with the strong performance of the company after its public offering. The current valuation is quite high based on earnings multiples as the company carries along a very sizable debt position. Therefore I continue to be on the sidelines, although the dividend yield is quite attractive.

I will reconsider the prospects for Pinnacle when the company is due to release its second quarter results on Wednesday.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.