My Biggest Turkey: Aurora Foods

In honor of Thanksgiving, I’ve decided to write about my biggest turkey, Aurora Foods. Aurora Foods was born of private equity cobbling together a bunch of orphan brands from major food manufacturers and loading them up with debt. These are brands you probably have in your pantry: Duncan Hines, Lenders Bagels, Van De Kamp, Mrs. Paul’s, Celeste Pizza, Aunt Jemima Frozen Breakfasts, and several others. I first bought it when it was trading at a reasonable P/E and had shown good numbers.

My timing was impeccable. The very next day, the stock was halted and it was announced that earnings would be delayed. When the stock next traded, it was down 70%. So I bought more. It soon came out that management had committed a massive accounting fraud and they later went to prison. I kept holding though, and even buying more as it dropped further, believing that new management could revive these once-proud brands. I even got more shares and cash as part of a class-action settlement. I still have the worthless stock certificate I received as a reminder of my foolishness.

New management was indeed able to get the company back to profitability for one quarter. It was enough to get them their bonuses that year, and I was able to sell a little at a profit thanks to the runup. The company would never report a profit again and soon thereafter entered bankruptcy and my investment disappeared with it. The prepackaged bankruptcy merged Aurora into some castoff brands from Campbell to form Pinnacle Food Corporation.

I learned several valuable lessons:

• Big companies rarely sell brands that can easily be “fixed” unless forced to because of antitrust concerns. If Procter & Gamble’s marketing whizzes and ample capital can’t fix it, Joe’s Overleveraged House Of Dead Brands probably can’t either.
• If an IPO is happening and somebody other than the company is getting the bulk of the proceeds, stockholders will more than likely be left holding the bag.
• What goes down doesn’t always go back up.

What was your biggest turkey? What did you learn from it?

Comments

[Amit Chokshi:]

LBO firms utilize the M&A platform in consumer products and foods quite often and it works in the private equity world in that they can pull out some dividends and realize some synergies from centraling SG&A and corporate processes. The idea doesn't always work so well in the public markets. The overlevered, second-rate consumer products companies can get burned when analysts finally get smart. The concept of shorting Jarden ("JAH") is based on the same theme that lost you some money.

2006 Nov 22 09:11 PM

[Zak Klemmer:]

Well my biggest turkey of the year is the Jan 17.50 Put I'm holding on BSX. I'm embarrassed that I haven't unloaded this dud; just last week there was a good opportunity to sell it back for a smaller loss than it closed at today. My rational thought was that "it's a weak stock and I'll get more for it tomorrow." But I'd have made more on RIMM since then and quite possibly more than I had bought this foul bird. OUCH!

2006 Nov 22 11:02 PM

[Joseph Back...:]

I too lost some money in Aurora Foods ... as well as Imperial Sugar, Northland Cranberries, and Chiquita -- all as a result of buying food stocks in 2000 as defensive stocks that might be turned around due to their branding.... and, all of which fell apart / reorganized in roughly the same manner. If I had put the money into the oil & gas companies where I had feared that I had already put "too many eggs" -- companies that were tettering on backruptcy such as KCS, BNO (now HNR), CHK, ForceEnergy (now FST), etc. ..... I would be far better off financially today.

2006 Nov 23 05:00 PM