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P&G Seen Enticing Del Monte Foods to Iams Deal: Real M&A

Procter & Gamble Co. Chief Executive Officer A.G. Lafley, under pressure to revive the consumer-products giant, may have a willing buyer for its Iams pet-food unit in Meow Mix maker Del Monte Foods Co.

P&G, which brought back Lafley as CEO in May amid calls from investors to improve sales, could boost its share price by selling assets including the Iams division, said shareholder HighMark Capital Management Inc. Del Monte Foods is now a logical buyer of Iams, said Exane BNP Paribas, because the private-equity owned-company is seeking to expand its pet products business after agreeing this month to sell its canned peaches and corn division for $1.68 billion.

P&G, the largest maker of consumer products, is languishing at a cheaper profit multiple than 86 percent of peers, according to data compiled by Bloomberg. Selling Iams could fetch P&G about $2.5 billion, said Sanford C. Bernstein & Co. For Del Monte Foods, buying the unit would bolster its position in the $20 billion U.S. pet-food and treats industry, pushing it past Mars Inc. for the second-biggest market share in North America.

P&G “needs to be a more focused enterprise and probably at this juncture, that means a smaller enterprise,” Peter Sorrentino, a Cincinnati-based money manager at Huntington Asset Advisors, which oversees about $14.7 billion including P&G shares, said in a phone interview. Iams is “a premium product and that’s the kind of thing that would look good. That would make a smart addition” for Del Monte Foods.

Allocating Resources

Paul Fox, a spokesman for Cincinnati-based P&G, said in an e-mail that the $220 billion company “will continue to focus our portfolio, allocating resources to businesses where we can create value and continuing to exit those where we cannot.” He said the company doesn’t comment on speculation when asked whether it would be open to selling the pet-care unit.

Chrissy Trampedach, a spokeswoman for San Francisco-based Del Monte Foods, said the company doesn’t comment on specific merger and acquisition plans.

Buyout firm KKR & Co. acquired Del Monte Foods with Centerview Partners and Vestar Capital Partners in 2011 with the intention of selling the consumer-products unit to focus on the pet-food division, said a person familiar with the matter who asked not to be identified because the process is private. The company announced this month that it’s selling the canned fruit and vegetable business to Del Monte Pacific Ltd., an unaffiliated Philippines-based foodmaker.

A representative for New York-based KKR didn’t immediately have a comment.

Pet Opportunities

The remaining pet food business will generate decent free cash flow and Del Monte Foods’ private-equity owners will “likely continue to try to grow that business,” Bea Chiem, a San Francisco-based credit analyst at Standard & Poor’s, said in a phone interview. The sponsors will “want to exit at some point down the road through either an IPO or selling the business or taking dividends over time. There’s definitely opportunities in pet.”

Zoetis Inc., the animal-health company that was spun off from Pfizer Inc. earlier this year, surged 19 percent in its trading debut and has climbed another 4.8 percent since. Expenditures on pets in the U.S. will rise to a record $55.5 billion this year, according to American Pet Products Association Inc., with food making up the largest portion of sales at about 38 percent.

To grow quickly in that market, Del Monte Foods would need to make acquisitions, according to Brian Weddington, a New York-based senior credit officer at Moody’s Investors Service. The company’s most recent annual sales from pet products totaled about $2 billion, according to a filing.

Motivated Buyer

If the company bought P&G’s Iams unit, “they would immediately have scale, they would have top brands,” Weddington said in a phone interview. “If an opportunity like that came to them at an attractive price, I think they would be motivated to get it done.”

Del Monte Foods’ share of the North American pet-care market would jump to almost 20 percent if it acquired Iams, second only to Purina-maker Nestle SA, which controls about 35 percent, according to data compiled by Bloomberg.

“You would be merging a weakish No. 3 and No. 4 to become quite a stronger No. 2 player,” Eamonn Ferry, a London-based analyst at Exane BNP Paribas, said in a phone interview.

P&G Reward

P&G shares are being discounted because the company is too diversified and too large, and selling assets like the pet-care business could be a “prudent move,” Todd Lowenstein, a Los Angeles-based fund manager at HighMark Capital, said in a phone interview.

The company traded yesterday at 19.9 times its profit in the last 12 months, a cheaper price-to-earnings ratio than all but two household products manufacturers valued at more than $10 billion, according to data compiled by Bloomberg.

If P&G sold Iams, “the market would reward management with a higher multiple, a higher valuation because they are getting focused,” Lowenstein, whose firm oversees about $19 billion including P&G shares, said in a phone interview. Iams is “non-core to their future strategic initiatives. They could probably exact a pretty decent price from someone who has a lot of synergy value in combining those businesses.”

Today, P&G shares rose 0.7 percent to $80.91.

Ali Dibadj, a New York-based analyst at Bernstein, said the Iams division could fetch about $2.5 billion in a sale, while Ferry of Exane BNP Paribas estimated the unit could be valued at as much as $3 billion. That would be the largest pet food or supplies deal on record, according to data compiled by Bloomberg.

Debt Load

An acquisition that large may require Del Monte Foods’ private-equity owners to contribute or raise more equity, said Weddington of Moody’s.

With equity financing from its private-equity owners and cost cutting and other financial benefits from a merger, Del Monte Foods could do a $2.5 billion deal without materially increasing its debt burden, Thomas Ferguson, an analyst at bond researcher KDP Investment Advisors Inc., said in a phone interview.

The company had about $3.9 billion in debt prior to the sale of the consumer-products unit. It will likely use at least some of proceeds from the canned fruit and vegetable deal to pay down borrowings, Ferguson said from Montpelier, Vermont.

A deal for Iams would be a very large transaction for Del Monte Foods and may not be cheered by bondholders, Ferguson said.

Even so, Del Monte Foods’ focus on pet care just as P&G’s Lafley is seeking ways to boost the company’s share price could make it a match for Iams, according to Matt McCormick, a fund manager at Cincinnati-based Bahl & Gaynor Inc.

“There’s particular pressure on A.G. Lafley to do something,” McCormick, whose firm oversees about $10 billion, including P&G shares, said in a phone interview. “I would not be surprised to see Iams spun out in some way shape or form.”

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