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B&G Foods (BGS) is at it again, making its fourth acquisition in the snack food sector in the past year. Each of these particular acquisitions had a slightly different twist than the prior brands acquired by B&G and marked a departure from what had been a highly successful strategy.

Historical Perspective

B&G is a manufacturer and distributor of shelf stable food products typically sold through supermarkets in the US, Puerto Rico and Canada. Some of its better known brands include Cream of Wheat cereals, Mrs. Dash and Ac'cent flavorings and Ortega. Instead of depending on organic growth, B&G's strategy had been to use leverage to acquire orphan brands from other companies to increase its revenue, EBITDA and free cash flow. And, since many of their products are manufactured by co-packers, the company's acquisitions typically required little in the way of incremental capital expenditures or adding personnel.

More importantly to investors, these acquisitions were typically free cash flow positive. The cash thrown off by the acquisition was used to quickly reduce debt and increase the dividend. It is a strategy that has resulted in five dividend increases since the end of 2010, with the most recent announcement having taken place this past July.

The acquired brands had typically been neglected by their former owners and were experiencing static or declining sales. B&G would revive the brands and increase sales with a variety of measures.

This reviving could be as simple as updating the packaging or resizing the package to a dollar store format. Or, it could target alternate channels of distribution where the product was underrepresented - i.e. mass merchants vs. supermarkets or club stores. Or, it could include introducing new flavors and partnering with well known brands like Cinnabon or Crock-Pot.

A New Direction

Then, towards the end of Q3 2012, B&G began acquiring snack food brands. The first transaction was for the New York Style® and Old London® brands from Chipita America, Inc. While this acquisition was immediately accretive in terms of free cash flow, that was the end of the similarities to most previous acquisitions. The purchase also included a manufacturing facility, its personnel and a sales organization. And while prior acquisitions had been funded with debt, this one followed a secondary offering of 4.7 million shares that raised just over $120 million.

A smaller acquisition of True North brands followed, and with very few details disclosed, it represented a departure from the openness of prior acquisitions. Next up was Pirate Brands, a brand that was actually growing revenue at the time of its acquisition. B&G CEO David Wenner discussed both the True North and Pirate acquisitions on the second quarter earnings call.

In the case of TrueNorth, the $3.2 million in net sales in the first 8 weeks of our ownership is very encouraging, but was somewhat inflated by pipeline volume associated with increased warehouse club distribution. Of course, that event in and of itself is encouraging as well.

... As we previously announced, we expect [the Pirate] business to add $80 million to $90 million in net sales to our business on an annualized basis, and once we completely integrate the business, adjusted EBITDA of $18 million to $20 million.

Unlike the other snack brands we have purchased, this brand has been growing at a double-digit rate for the past few years, and we are very excited about the prospects for continued growth at an above average rate. ...But even as we talk about the growth prospects for the brand, I would emphasize that this acquisition is very consistent with our acquisition model. It has a very healthy EBITDA margin, and we project that free cash flow from the brand will be over 70% of adjusted EBITDA.

Note that Wenner did not make the same comment about the True North Brand. And, with the most recent purchase of Rickland Orchards, only the annualized revenue and purchase price were disclosed, with no mention about EBITDA or free cash flow.

...the Rickland Orchards® brand, which was launched in March 2012, has already achieved annualized net sales exceeding $50.0 million, ...

The purchase price paid for Rickland Orchards was approximately $57.5 million, subject to post-closing adjustments, of which approximately $37.4 million was paid in cash and approximately $20.1 million was paid in shares of common stock of B&G Foods. Natural Instincts will also be entitled to earn-out payments if certain performance goals are achieved. B&G Foods paid the cash portion of the purchase price for the acquisition, which closed today [October 7th], from borrowings under B&G Foods' revolving credit facility.

Once again, a snack foods acquisition resulted in the dilution of the current shareholders. The $20.1 million of stock at the recent price of about $35/share translates to an additional 575 thousand shares - or an increase of 1.1% to the 52.6 million shares previously outstanding.

Personnel

The 63 year old Wenner has been CEO for 20 years and has been the very public face of the company. He has also been very hands-on and appeared to be intimately involved with all aspects of the business. With the rapid pace of acquisitions in the snack food sector over the past year, it would seem that Wenner could use some help.

The Rickland acquisition included two key executives that could provide that help - Jason Cohen, the founder and Chief Executive Officer of Rickland Orchards, and Michael Sands, Rickland Orchards' Chief Operating Officer. Cohen will become B&G's Executive Vice President of Club Channel, and Sands will become Vice President of Product Innovation. Hopefully this added depth will benefit shareholders.

The Dividend

As noted earlier, the dividend has been increased five times since the end of 2010. Investors have become spoiled, expecting another increase each time a new acquisition is announced. Whether or not another dividend increase will be announced for the fourth quarter or if investors will have to wait until early 2014 remains to be seen.

The BGS dividend has increased 88% since it was cut to $0.68 per share in late 2009. Historically, its yield has compared very favorably to other companies in the food sector and that has usually been seen as a reason to invest in the company. Currently, that advantage has faded, more as a result of the increase in the stock price rather than others increasing their dividends more rapidly.

The current yield is 3.6%.

Summary

As a long term shareholder of B&G, I had become quite comfortable with the way the company would lever up the balance sheet to make accretive acquisitions of orphan brands from larger companies. The free cash flow generated by the acquisitions would then be used to rapidly pay down the debt and fund dividend increases. And, most importantly, the company has usually been able to reinvigorate these acquired brands.

The recent focus of the company in the very competitive snack food sector is a departure from that strategy and may represent increased risk. B&G has acquired growth businesses, manufacturing assets, sales organizations, and has been issuing stock rather that raising debt to fund the purchases. It has also been a bit less open about the financials of some of the recent purchases.

Clearly, the market has little concern about this departure from the prior B&G strategy. It reacted very favorably to the latest acquisition news, sending the shares up 1.1% on a day when the major indexes were falling. Whether that optimism is based on an expected dividend hike or the idea of B&G becoming more of a growth company remains to be seen. More important is whether or not that optimism is justified.

Some of these answers could become apparent when the company reports earnings after the bell on the 17th of this month. At that time, investors will be receiving updated information about the success of the New York Style, Old London, True North and Pirate Brands, and there is the possibility that Wenner will provide more information on the financial aspects of the Riskland transaction.

In the interim, it should be relatively safe to hold onto B&G and continue earning those dividends, even if those dividends will now be paid out on more shares.

Source: B&G Foods Dilutes Shareholders With Rickland Orchards Acquisition