The children's fairy tale about Hansel and Gretel began "Once upon a time..." and told the tale of two young children that got lost in the woods. Well...
Once upon a time B&G Foods (NYSE:BGS) was a company that sold and distributed a diversified portfolio of high-quality, branded, shelf-stable foods. In those days, it extensively used co-packers for manufacturing, and grew by acquiring brands that were leaders in their category and had been largely ignored by their prior owners. By adhering to its criteria, B&G had been successful in acquiring niche brands, and was typically able to generate better than 50% free cash flow out of EBITDA. As a result, it was also able to regularly increase dividends following the acquisitions.
Then, in late 2011, it made a large purchase from Unilever (NYSE:UL) that mostly fit the model, but also included two non-food products - Static Guard and Kleen Guard. And, although the products were very similar in some respects to the mainstream B&G business, there was one more difference. The acquisition significantly increased its presence in Canada and would lead to a change in the Canadian distribution model. More importantly, this acquisition was down a new, and slightly different, path.
Following the Unilever acquisition, B&G began down another path, making a more significant departure from its model when it entered the snack foods market with the purchase of the New York Style® and Old London ® brands from Chipita America, Inc. (Actually it was a re-entry, since B&G had previously owned and disposed of this business.) This acquisition was a departure in another sense. It included a manufacturing facility rather than using co-packers, and added a sales force and a total of 250 employees.
That entry into snack foods was only the beginning. The new path was turning into a busy road as the company followed up with three more snack food acquisitions during 2013; True North (where the company was far less open about the revenue, purchase price and EBITDA of the acquisition), Pirate Brands (a brand that had been growing at double digit rates) and Rickland Orchards (an asset with only an 18-month history).
At the Wells Fargo conference earlier this year CEO David Wenner discussed the entry into snack foods:
...snacks now represents almost 25% of our sales pro forma and very meaningful. And what it has done in long term for us, I think is given us a growth story to go along with the cash flow yield and return on investment story for the shareholders. Because I anticipate that as rates increase when they increase, the yield story will be a little less compelling than it is today. And to the extent we have a growth story that still rings true in terms of free cash flow and distribution to shareholders; I think we've got the best of all solutions.
The entry into snack foods has been a major shift for the company, but it hasn't changed its ability to grow the dividend. In the year and a half since the four acquisitions, the dividend has been increased four times for a total of 26%. This brings us to the latest acquisition announced earlier this week.
B&G Acquires Specialty Brands
B&G announced that it has agreed to acquire:
Specialty Brands of America, Inc. and related entities from affiliates of American Capital, Ltd. and certain individuals for approximately $155 million in cash, subject to certain closing and post-closing adjustments.
While the press release states B&G "expects the acquisition to close during the second or third quarter of 2014," the 8K states it "expects the acquisition to close in April 2014." The purchase will be made with a combination of cash on hand and loans under its revolver. More important for investors, it is expected to be immediately accretive to both earnings and free cash flow per share. After full integration it is expected to generate net sales of approximately $85 million and adjusted EBITDA of $20 million.
The acquisition is a combination of snack foods, shelf-stable grocery items and adds another new path for B&G - refrigerated products. The brands acquired include:
- Bear Creek Country Kitchens - packaged dried soup, rice and pasta dishes
- Spring Tree - the supplier of one third of the world's pure maple syrup
- Cary's - the third leading brand of pure maple syrup in the US
- MacDonald's - the best selling brand of pure maple syrup in California and the Northwest
- New York Flatbreads - low fat, fat free and bite size flatbreads in a variety of flavors
- Canoleo - a canola based margarine
In addition to Canoleo, the first refrigerated product, there is another interesting aspect to this latest acquisition. Four of the brands are in the same space current company brands. Both Maple Grove, which has pure maple syrups in addition to fruit flavored syrups, and Vermont Maid compete in the space occupied by the three new syrup brands. The New York Flatbreads are in the same space as a number of products sold under the brands acquired from Chipita.
Considering the overlap of products and the new entry into the refrigerated sector, it should be obvious that the key part of the acquisition is the Bear Creek line of products. The press release states:
Specialty Brands' largest brand is Bear Creek Country Kitchens. Bear Creek is the leading brand of hearty dry soups in the United States. Bear Creek also offers a line of savory pasta dishes and hearty rice dishes.
When B&G holds its first quarter conference call after the market closes on April 16th, it is likely that questions will be asked, and hopefully more information will be revealed. Questions about whether or not physical production assets and personnel are part of the acquisition. Or personnel. And, even more importantly, how B&G plans to grow these soon to be acquired brands.
As noted above, dividend increases typically follow acquisitions, and this one should be no different. At the RBC Capital Markets Consumer and Retail Conference held last month Wenner discussed acquisitions and the dividend. He noted that 50%-60% of free cash flow [FCF] came out of EBITDA. At an earlier conference he said:
...if you were to do a regression analysis of our M&A activity versus our dividend increases, you would find that as we buy more free cash flow through M&A, a certain proportion of that goes to dividends and that's where you see most of the dividend increases we do. We really believe in returning a good proportion of free cash flow to shareholders, roughly 50%, 60% as the guideline.
So, if 50% of EBITDA is FCF, and 50% of FCF will be returned to shareholders as dividends, there should be $5 million allocated to another dividend increase. With 53,445,910 shares outstanding at year end 2013, the company can be expected to allocate just over $0.09 per share to a dividend increase. Despite having a dividend increase each of the last three quarters - or perhaps because of it - my expectation is that we will see another $0.02 increase (nearly 6%) in the quarterly dividend before the end of the year. That would increase the yield on the recent closing price of $32.05 up to 4.5%.
It's an attractive yield, especially compared to other food companies. More importantly, it has been increasing rapidly. As previously noted, Wenner expressed concern that while the dividend is attractive to shareholders in today's low interest rate environment, interest rates won't remain this low forever. It was the reason to look at diversifying into snack foods to add a growth component to the stock valuation.
Growth and Risk
Many investors may find the company's leverage, which was 4.3x before this latest acquisition, to be too high. The company management has often expressed the sentiment that it is willing to go to 5x, but going over 5x would be detrimental to the share price as its institutional investors would become sellers of the stock. At the RBC conference CFO Robert Cantwell discussed the 5x as a limit unless a compelling opportunity came along.
Fed policy promoting low interest rates has enabled companies like B&G to increase leverage without a commensurate increase in risk. It is a risk that investors in B&G have found acceptable, and as long as the company is able to use the incremental EBITDA and cash flow to simultaneously increase the dividend and quickly reduce the leverage, the risk has proven to be quite rewarding.
Still, it is not quite clear how the latest acquisition fits into the company's overall plans. Both the refrigerated product purchase and an apparently large overlap of brands could present challenges. In addition, the line of Bear Creek Country Kitchen offerings is quite extensive, with 15 soup flavors along with 7 pasta and 6 rice dishes.
The recent acquisition of Specialty Brands was well received by Wall Street as both Stephens and RBC upgraded the stock. The shares climbed from $30.41 to $33.47 in the two trading sessions following the announcement.
Wenner has raced down several new paths over the past two and a half years, and other than a slight stumble in Q3 of 2013, has so far demonstrated an ability to make these acquisitions work to the benefit of shareholders. It remains to be seen how the latest acquisition will work out, and whether the string of snack foods acquisitions will achieve the desired results. So far it appears that Wenner has not become lost in the woods, and I am looking forward to a fairy tale ending where my investment will achieve a happily ever after performance.
Disclosure: I am long BGS. 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.