Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

A little over a year ago, sausage maker Hillshire Brands avoided making a big mistake: Just as it was on the verge of buying Pinnacle Foods -- a hodgepodge of low-growth and, in many cases, highly processed products -- it was offered a better deal with Tyson Foods. Hillshire canceled the Pinnacle transaction, accepted the Tyson takeover and lived happily ever after. (Tyson is the best-performing consumer staples stock in the S&P 500 this year.)

As for Pinnacle, it regrouped, turned from seller to buyer and made a key purchase of Boulder Brands, a maker of the kind of natural and organic foods that have become increasingly popular. Now, the company known for tired brands like Hungry-Man nuke-able meals and Log Cabin maple syrup is looking good -- good enough to reignite takeover speculation. Is it warranted?

A Pinnacle Price
A few analysts raised their stock-price projections ahead of Pinnacle Foods' earnings later this week.
Source: Bloomberg

Pinnacle's shares are at a record, giving the company a $5.7 billion market value as of Monday. On Thursday, it reports second-quarter earnings and results should come in pretty strong. Some growth is expected to come from its new iteration of Wish-Bone salad dressings called EVOO (which is just shorthand for extra virgin olive oil and is what happens when salad dressing marketing teams are told to get creative). This is also the first full quarter since Pinnacle completed its takeover of Boulder Brands. Pinnacle's Birds Eye frozen vegetables are a bright spot, too. 

Boulder Brands -- from which it gained Earth Balance plant-based snacks and Evol better-for-you frozen eats -- was exactly what Pinnacle needed to offset its less-exciting products. But that doesn't mean Pinnacle is the sort of company that would make a good takeover candidate at a time when acquirers need to be carefully using their cash on only the best, most promising businesses. Kudos to Pinnacle for innovating in salad dressing, but at the end of the day, we're still talking about salad dressing, the same product that's long been on supermarket shelves. A little added oil and herbs to boost sales for a few quarters isn't enough to make the company worthy of a big acquisition premium.

The departure of Pinnacle's CEO, Bob Gamgort, announced in March, certainly fueled M&A speculation. He went to run Keurig Green Mountain, the single-cup coffee business that was taken private by JAB Holding earlier that month. But while some saw his move as a testament to his skill in running a non-bloated business (Pinnacle's margins usually top the average of its peer group), it's also worth noting that he left only a couple of months after closing the Boulder Brands deal -- the company's biggest, most expensive purchase to date, which pushed its leverage to nearly 6 times trailing 12-month Ebitda. 

Debt Burden
Pinnacle Foods, rated junk by S&P Global Ratings, is among the more highly leveraged U.S. foodmakers. The CEO who led its largest deal in January departed shortly thereafter for another gig.
Source: Bloomberg
Pinnacle's Purchases
Its latest target, Boulder Brands, gave Pinnacle Foods products that cater to newer consumer preferences.
Source: Bloomberg

Gamgort was replaced by Mark Clouse, who oversaw brands such as Oreo as chief commercial officer of Mondelez (formerly Kraft Foods) and before that, was chief growth officer. He obviously has a strong background in the industry, but his tenure at Pinnacle is too short to judge yet. Based on his experience, it seems he's more likely to focus on growing Pinnacle with help from acquisitions, rather than him being appointed to sell the company.

And for those who think Boulder Brands gave competitors a reason to bid for Pinnacle Foods, it probably didn't. It's not a "clean" enough target for any single buyer because it has too many different products with varying degrees of growth and even nutritional quality. The bottom line: Pinnacle may be doing well for its shareholders right now, but it doesn't have quite the right ingredients (yet?) to get swallowed by a larger rival. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net