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— Analysis —
Dealmakers who have to navigate macro trends in technology or demographics or geopolitics make for a good story. Pharmaceutical executives, for example, are trying to do deals that anticipate how new medicines will be invented and who will pay for them. Mining company CEOs have been merging and selling stakes with a view to how China, India and other developing economies will look over the next decade. Information technology dealmakers are always peering around the digital corner.
And then there are Cream of Wheat-type deals, favored by companies like B&G Foods Inc. B&G bought Cream of Wheat and Cream of Rice from Kraft Foods Inc. for $200 million in 2007. Under its new owner, the venerable hot cereal brand remains pretty much as it was throughout its 106-year history. The biggest change came this spring, when B&G introduced an instant cereal with added fiber and rolled out a kid-focused instant product with Nickelodeon's SpongeBob SquarePants on the package. "The question was how to bring new users into the product." says B&G chief executive David Wenner. But dealmaking at B&G is not about riding the currents of history. It's about getting the most out of a good recipe. The strategy, refined over eight acquisitions, is to buy and improve smaller, neglected, dry grocery brands such as the Ortega Mexican food line, Vermont Maid Syrup and B&M Baked Beans. What drama there is lies more on the financial side, no big surprise in a sector that private equity firms have favored. B&G itself is a former portfolio company of New York buyout firm Bruckmann, Rosser, Sherrill & Co. LLC. Now publicly traded on the New York Stock Exchange, it has an unusual capital structure. In 2004, in the first stage of Bruckmann Rosser's exit, B&G became the first of only four companies to sell a hybrid debt and equity instrument called an enhanced income security. That left it with a heavy debt load, and investors worried last fall when a spike in commodity prices -- especially maple syrup -- took a chunk out of Ebitda. In late October the shares fell below $3, down from more than $12 a year earlier. B&G responded with layoffs, a dividend cut and a share buyback. Gross profit for the fourth quarter fell 12.7% to $34.7 million, down from $39.7 million in the fourth quarter of 2007. As of mid-April, the shares were above $5. "We hit a rough spot, but it wasn't a catastrophic rough spot," says Wenner, who has led the company since 1993. "We know how to operate the company with leverage. The cash flows are very strong and reliable." And the leverage, of course, is part of the recipe, which essentially calls for running these brands on an appropriately sized equity base and then capturing market share and shelf space point by point and inch by inch. Or often, recapturing: Cream of Wheat had $60 million in sales for Kraft when B&G bought it -- down from $90 million five years earlier, according to Wenner. There's an art to separating a small brand from a big company, and that, too, is noted in B&G's cookbook. One issue for divestors is the ease of the transaction. Will there be extensive due diligence or lengthy transition services agreements? Not with B&G, Wenner says. "We just want to know what your sales are, what your trade spending is, what your net revenue is. If you have a co-pack agreement, what does it cost to buy the product? "And then, once we execute this, we will be gone in 30 days." Typically B&G buys just the brands and continues a co-pack agreement with a third-party manufacturer. For Cream of Wheat, Kraft had a co-pack deal for the stove-top version, which B&G assumed. But B&G also had to invest in a capital project at one of its facilities for the third of the business that makes the faster-growing instant cereals. If Cream of Wheat can be adapted when times change, the same can't be said for B&G's dealmaking recipe. Wenner says the food giants have more orphan brands to sell, but in the current economy they prefer to retain the revenue and wait until the brands can fetch higher prices. B&G, for its part, would find it tough to finance a deal. When the financial weather improves, though, look for B&G and other companies with similar strategies, such as Pinnacle Foods Group Inc., owned by Blackstone Group LP, to be back at it. |
There's something eye-catching about a transaction with a good teleological angle. A deal has a certain oomph if it's part of a grand narrative about economic change.
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