Last week B&G Foods (BGS) announced that it had "entered into an agreement to acquire the New York Style® and Old London ® brands from Chipita America, Inc. for approximately $62.5 million in cash." This acquisition is a departure from other recent acquisitions because it also includes a manufacturing facility and taking on 250 employees. For example, when B&G acquired Culver Specialty Brands ("CSB") from Unilever, the six products were all produced by co-packers and required no new plants or equipment. This is also B&G's first entry into the snack foods market, and, as with the CSB acquisition, will be immediately accretive to earnings.
The CSB acquisition took place less than a year ago, and despite the $325 million dollar price tag and a significant increase in debt, that acquisition was quickly followed by two dividend increases. The first from $0.84 to $0.92 and then to $1.08. When reviewing that acquisition at the recent Barclays Back-to-School Conference, CEO David Wenner noted that the company was still reaping synergy benefits in Canada and that "we're going to save somewhere between $1 and $2 million by cutting out the distribution margins there" beyond what had been expected.
At the conference, Wenner had also discussed the potential for additional acquisitions and that the company's leverage ratio had declined to 4x, although they were comfortable with much higher ratios. What held it back from going above 5x would be the negative reaction from institutional investors. In the company's most recent 10Q, B&G had $21.4 million in cash, so this recent acquisition for $62.5 million will increase debt and that leverage ratio. It will also increase revenue by "$45 to $50 million and EBITDA of approximately $8 to $9 million in 2013."
Will a Dividend Increase Follow?
B&G currently yields 3.4% and will go ex-dividend on September 26th with payment on October 29th. Historically the company has paid out a large portion of its earnings in dividends, and prior to the recent surge in the price of its shares, it had been yielding well above its peers. J. M. Smucker (SJM) is at 2.4%, General Mills (GIS) is at 3.3%, Kellogg (K) is at 3.5% and Pepsi (PEP) is at 3.0%, so that gap has narrowed significantly.
With an additional EBITDA of "$8 to $9 million," it is likely that there will be a $3-$4 million increase in FCF. Coupled with the unexpected savings from the CSB synergies, it is possible that investors could see an increase in the dividend payment early next year.
Over the past several years B&G has been successfully integrating and revitalizing the brands it has acquired. Shareholders have benefited from this success with both dividend increases and share price appreciation. When the latest acquisition was announced on Friday, the shares reached a new all time high of $32.84 and have since declined to $31.52.
I expect to see the dividend increased again when the next announcement is made, although it seems the market may have already priced it into the shares. And, as much as I admire management's performance, I am concerned about the price of the shares, and, to a lesser extent, the increase in debt. I am still long, but will likely consider writing some covered call options in the near future.
Additional disclosure: I may write at the money covered calls in the near future against my BGS position.