In an article about the major acquisition of six brands by B&G Foods (NYSE:BGS) from Unilever NV (NYSE:UN), I noted that there were many positives in the press release. The acquisition included several products found in the supermarket spice aisle and is expected to be accretive to earnings. I also expressed some reservations about the inclusion of two non-food brands - Static Guard and Kleen Guard - and how they fit into B&G's product portfolio. After all, the company has "Foods" in the title and its web site describes the company as follows:
B&G Foods and its subsidiaries manufacture, sell and distribute a diversified portfolio of high-quality, shelf-stable foods across the United States, Canada and Puerto Rico.
I was curious about how these two non-food products would be addressed on an analyst call on November 1st. I was also looking for any additional information that management would disclose. But before addressing the some of the additional information disclosed on the call, here's a brief recap of the past few weeks.
In the acquisition announcement on October 28th, investors were informed that:
- The purchase price was approximately $325 million,
- The brands generated approximately $90 million in revenue for the 12 months ending September,
- The brands were expected to generate EBITDA of $35 to $38 million during fiscal 2012,
- The transaction would be all cash, and
- The transaction would be immediately accretive to earnings per share and free cash flow.
Aside from taking on additional debt, the transaction looked very good for shareholders. The acquired brands generate an EBITDA margin above the average of the current B&G products, and the market endorsed the transaction, sending the shares up more than 8% on the first trading day after the announcement. It should also be noted that the shares have even risen a bit more in the week since the announcement.
Also working favorably for the stock price was a 9.5% increase in the dividend and a third quarter earnings report where the company increased full-year guidance. These three events took place during the last two weeks in October.
The analyst call (a replay can be accessed from the company's website through November 15, 2011) went into more detail about the products, how they fit into B&G's strategy, financing, debt leverage, excess cash flow, etc. CEO Dave Wenner discussed many of the strategic implications and how the new products were manufactured and distributed.
The products fit the company's acquisition profile - less than $100 million in sales and generate above industry average margins. They are sold predominantly in the U.S. (the exception being Sugar Twin) through supermarkets (about 50% of net sales for both current and new products), although 18% of current product sales are to the food service industry compared to 13% for the new products. There are some other minor differences. Current products have more of a presence in WalMart (NYSE:WMT) and the newer products have more of a presence in mass merchandisers (primarily because of the two household products brands) and price club stores. The Sugar Twin brand has much more of a Canadian presence and could help enhance sales of B&G's Accent, Cream of Wheat and Underwood brands which are currently sold in Canada.
The acquisition of Static Guard and Kleen Guard are B&G's first household products. Wenner said that the company had been looking at this new area for several years. Both distribution systems and margins of these two brands are similar to many of the company's current food products.
All six of the new brands are manufactured by co-packers, a method of manufacture very familiar to B&G since they use co-packers for about one third of their current products. As a result of using co-packers, there will be no capital assets or personnel acquired in the transaction, nor will there be any incremental cap-ex requirements associated with the acquisition.
After closing of the transaction, Unilever will provide transition services under a separate agreement. Typically a transition of this type takes B&G less than 30 days. However, because of the Canadian aspects associated with Sugar Twin, the company expects the transition to take somewhat longer, but less than 90 days.
With respect to the particular brands, Mrs. Dash appears to be the key to the transaction. The spices represent about two thirds of the total sales and a somewhat smaller portion of the EBITDA due to more extensive marketing. When questioned about whether or not there could be cost saving synergies and improvements to EBITDA, Wenner said no. He added that there would be additional costs for B&G because they don't have the scale efficiencies of Unilever and B&G uses brokers at a cost of 3% as opposed to Unilever's use of direct sales.
The $325 million price also includes finished goods inventory. Debt will increase as a result of the transaction, increasing to 4.3x EBITDA and will carry an interest rate of about 6%. It is a high level of debt and some might think this could restrict the company's flexibility to aggressively pursue other opportunistic acquisitions or increase the dividend. This is not entirely correct, although there could be some short-term implications. The acquisition will increase the company's annual projected excess cash flow - after dividends - by 70% or about $20 million to more than $50 million.
What will the company do with the significant excess cash flow? When asked whether the company would increase the dividend, CFO Bob Cantwell replied that the first priority would be to reduce the debt back below 4x. Wenner noted that it was not so much that he is uncomfortable at 4.3x, but he would like to think of the reduction to below 4x as "recharging the battery," and neither seemed to think it would take very long to return to below the 4x level.
At the end of the call Wenner said "Obviously this is a very meaningful and very accretive acquisition for B&G, the kind that we've done in the past with Cream of Wheat and Ortega. It's a game changer for us in terms of taking the business to another level. We hope to bring the same level of success to this that we have to the acquisitions in the past and we certainly believe it's a very good move for shareholders."
This shareholder agrees that it's a very good move for shareholders. I like the dividend yield of 4.3% (based on a $21.50 price as of this writing), remain long the stock, and expect another dividend increase towards the end of 2012.
Disclosure: I am long BGS.