The Clabber Girl Acquisition
It didn't take long for B&G Foods (BGS) new CEO, Ken Romanzi, to make his first acquisition, Clabber Girl Corporation. As an investor in B&G, a lot more information would be useful, but the limited information that was disclosed in the recent press release indicates this is good news for investors.
Clabber Girl, a subsidiary of Hulman & Co., is described as "the number one retail baking powder brand, [and other] product offerings include the Rumford, Davis, Hearth Club and Royal brands of retail baking powder, baking soda and corn starch, and the Royal brand of foodservice dessert mixes."
The B&G press release also notes that the company:
- expects the acquisition to be immediately accretive to earnings per share,
- expects the acquisition to be immediately accretive to free cash flow, and
- projects the business to generate approximately $70 to $75 million of net sales on an annualized basis, and
- the purchase will be funded with cash on hand and a drawdown of the revolver.
I would certainly have liked to see the B&G press release also include the price paid and the expected EBITDA. According to an Indiana Business Insider article headline, it appears as though the price paid was $80 million: "UPDATE: Hulman & Co. sells iconic baking powder maker Clabber Girl for $80M". (This was subsequently confirmed in an 8K filing.) What's not known is whether this includes any manufacturing facilities, inventory personnel, etc.
On the plus side, the brand is one of those that the company's first CEO (and current Board member), David Wenner, would likely approve. It's number one in its category and generates less than $100 million in annual sales. It also would seem to be one that would be a good "companion" to B&G's Baker's Joy product. Now, if only we knew about that EBITDA...
In the past, B&G has stated that the objective of their acquisitions is to purchase brands with high EBITDA margins, where approximately half the EBITDA margin is turned into free cash flow and half that free cash flow would be returned to shareholders in the form of rising dividends. And, even though I don't expect to see a dividend increase this year, the expectation that Clabber Girl will be immediately accretive to free cash flow is a positive sign that the current dividend can be maintained.
I have owned B&G for more than a decade, and it's the dividend, and the company's dividend policy, that has been the main attraction. The Dividend Policy, as stated in the SEC filings:
...our stockholders are better served when we distribute a substantial portion of our cash available to pay dividends to them instead of retaining it in our business. Under this policy, a substantial portion of the cash generated by our company in excess of operating needs, interest and principal payments on indebtedness, capital expenditures sufficient to maintain our properties and other assets is distributed as regular quarterly cash dividends to the holders of our common stock and not retained by us.
The current $1.90 annual dividend was yielding more than 8.5% on May 16th's closing price of $22.12. It's a dividend that has typically been much higher than other companies in the packaged food business. For instance,
- General Mills (GIS), from whom B&G purchased the Green Giant and Le Sueur brands yields 3.77%,
- PepsiCo (PEP), whose Quaker oatmeal, Stacy's snacks, and Tostitos salsa compete with B&G's Cream of Wheat and McCann's cereals, New York Style, Old London and Back to Nature snacks, and Ortega salsa, yields 2.9%,
- and J. M. Smucker (SJM), whose jelly and preserves compete with B&G's Polaner brand, yields 2.68%.
Clearly, B&G isn't nearly as large as these other companies, nor does it have their dividend history. Still, it has paid a dividend ever since going public in 2004. B&G cut its dividend from $0.85 to $0.68 in January of 2009, and it remained there until it was increased to $0.84 in May of 2011. Since then, the dividend has been increased a total of 10 times, with some of those increases occurring in consecutive quarters and twice investors had to wait six quarters between increases. The current quarterly dividend has remained at $0.475 for four quarters.
The market has clearly priced the risk of a dividend cut into B&G shares, or the yield would not be more than 8.5%. Despite this, I had been relatively comfortable that the dividend was safe for the next year or two, but I thought Romanzi and the new management team would be focusing on cleaning up the balance sheet, reducing distribution and warehousing costs and concentrating on managing the trade discounts and pricing issues.
I had not expected Romanzi to make an acquisition so soon after taking over as CEO, especially with the debt levels still elevated. Perhaps, the opportunity to make a purchase that would be immediately accretive was just too good to pass up.
Bottom line? If I knew the expected EBITDA, I might have added a few more shares, even though it would have taken me above my targeted allocation. I also would have recommended that others purchase shares for the dividend and potential appreciation. Since I'm flying blind with respect to the expected EBITDA of the acquisition, I will simply continue to hold onto my full position and collect the dividend.
Disclosure: I am/we are long BGS, PEP. 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.
Additional disclosure: I am long both PEP and BGS, with covered calls sold against portions of both companies, and am currently reinvesting the dividends. I have no positions in other companies mentioned in this article, and no intention to open any new positions.