A KKR & Co.-led group agreed to acquire Del Monte Foods Co. in a $4 billion transaction that will give the New York buyout firm pet-food brands such as Meow Mix and Kibbles ‘n Bits.
KKR, Vestar Capital Partners and Centerview Partners will pay $19 a share in cash, San Francisco-based Del Monte said in a statement yesterday. The buyers will assume about $1.3 billion in debt. The deal will likely close in March, unless Del Monte finds a better offer before Jan. 8, according to the statement.
The acquisition brings KKR a pet-food business whose sales have more than doubled in the past four years, bolstered by the purchase of cat-food labels and Milk Bone dog treats. The unit’s revenue climbed 4.6 percent last year, more than twice the rate of the unit that produces canned fruit, accounting for almost half Del Monte’s $3.74 billion in total revenue.
“Del Monte has a history of success in its fruit and vegetable offerings; unfortunately, that is the half of the company that has seen its fortunes fall during the down economy,” Marcia Mogelonsky, an analyst at Mintel International in Chicago, said in an interview. “KKR and other potential buyers are more likely to be looking to grow the pet-food products than the fruit and vegetables, as the recession seems to have been kinder to dogs and cats than to humans.”
Del Monte rose 84 cents, or 4.7 percent, to $18.83 in New York Stock Exchange composite trading. The shares have climbed 66 percent this year.
This is the largest leveraged buyout agreement since the collapse of Lehman Brothers Holdings Inc. in 2008 led banks to shun financing for most such transactions. The offer price is about 40 percent more than Del Monte’s average stock close in the three months to Nov. 18, the company said. It values Del Monte at about 6.3 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg.
In 2006, buyout firms TPG Capital and Leonard Green & Partners LP agreed to buy Petco Animal Supplies Inc. for about $1.8 billion, the largest U.S. pet-care industry deal in the past five years. That transaction, whose premium amounted to 48 percent, valued the company at about 7.9 times Ebitda.
KKR, run by Henry Kravis and George Roberts, isn’t alone in pursuing pet foods this year. Nestle SA, the world’s largest food company, bought dog-snack maker Waggin’ Train LLC from private equity firm VMG Partners in September, and in May, Procter & Gamble Co. agreed to acquire closely held Natura Pet Products Inc.
The pet-food unit’s share of Del Monte’s total sales has grown to 47 percent in the 12 months ended April, from 29 percent in fiscal 2005. Sales derived from pet products more than doubled in the five years through April, compared with a 3.4 decline for the rest of the business, according to data compiled by Bloomberg.
More than 60 percent of U.S. households have at least one pet, according to the American Pet Products Association. The U.S. pet-food market grew 26 percent to $18.9 billion from 2005 to 2010, according to data tracker Euromonitor International in Chicago. Del Monte has a 9 percent share, placing it fifth behind Nestle, Mars Inc., Procter & Gamble, and Colgate-Palmolive Co., Euromonitor said.
The consumer business accounts for the rest of Del Monte’s revenue. That division is likely to face challenges in the first half of the year, Chief Executive Officer Richard Wolford said on a September conference call. More than 90 percent of Del Monte’s sales are generated in the U.S.
Canned Food Deals
Over the past five years, there have been more than 25 deals in North America targeting canned food companies, according to data compiled by Bloomberg. The average premium in those deals was 15.2 percent.
“Del Monte is a perfect target for a private equity firm,” analyst Tim Ramey of D.A. Davidson said today in a note to clients. “The company has long been valued well below the rest of the food sector.” The Lake Oswego, Oregon-based analyst recommends buying the shares.
The buyout of Del Monte by KKR follows other private-equity food deals and speculation. On Nov. 5, Lion Capital LLC of London said it would acquire canned-seafood maker Bumble Bee Foods LLC from New York buyout firm Centre Partners Management LLC for $980 million.
Barclays Capital Inc. provided financial advice to Del Monte, while Gibson Dunn & Crutcher LLP gave legal counsel. Centerview Partners was the lead financial adviser to the buyout group. Bank of America Merrill Lynch, J.P. Morgan Securities and Morgan Stanley also gave financial advice to KKR and its partners, while Simpson Thacher & Bartlett LLP gave legal counsel.
Bank of America Merrill Lynch, Barclays Capital, JPMorgan Chase & Co. and Morgan Stanley arranged the debt financing, joining KKR Capital Markets LLC, according to a statement yesterday.
According to a regulatory filing from Del Monte today, Del Monte would pay a termination fee of $60 million if it finds a better offer and $120 million “in all other circumstances.” KKR would pay a breakup fee of $249 million if it walks away, according to the filing.
Del Monte and KKR’s history together goes back at least two decades, when the New York firm sold the canned-food business after its $25 billion buyout of RJR Nabisco.
New York-based Vestar was founded in 1988 and has been involved in deals for Birds Eye Foods, Michael Foods, and Celestial Seasonings. Centerview is based in Rye, New York, and provided advice to Kraft Foods Inc. on the sale of its frozen pizza business to Nestle SA earlier this year.
Buyout companies use a combination of their own funds and debt to pay for takeovers and then seek to improve profit by boosting sales, selling assets and cutting costs. The firms typically sell the companies within five years.