For those of you who are not avid followers of the leverage buyout transaction market, or readers of the Wall Street Journal, it may come as news to you that on November 25th, while you were likely in a tryptophan induced stupor, a private equity consortium agreed to take Del Monte Food Co. private in a transaction valued at slightly more than $5 billion.   The buying group included Kohlberg Kravis Roberts  & Co., better known as KKR, of RJR Nabisco fame, among other notable transactions.   Both these fact will become important later.  KKR was joined in the transaction by Centerview Partners Management LLC and Vestar Capital Partners.   This fact has no relevance going forward however.

In and of itself a transaction involving Del Monte is hardly notable.   In fact, KKR was once the owner of Del Monte.   The company was one of many brands under the RJR Nabisco umbrella that was sold off, for nearly $1.5 billion, to pay down debt in the early 1990s.  The buyers later sold the business to Texas Pacific Group for $809 million in 1997.    In short, Del Monte has been around the transaction block and therefore news of a deal should not be “above the crease” material in and of itself.

Further, when you think of Del Monte you likely think of canned pineapple, or at least I do.   After all Del Monte is a sacred American brand in the field of shelf stable food products.  The company’s Consumer Products segment manufactures, markets, and sells branded and private label fruit, vegetable, tomato, and broth products under the  Del Monte, Contadina, S&W, and College Inn brands, among others.   The company sells its products through direct sales force and independent food brokers to grocery, club store, supercenter, and mass merchandiser customers; dollar stores, drug stores, convenience stores, military, food ingredients, and private label customers; and the foodservice industry.  Exciting I know.   Hang on, it gets more interesting; I promise.

Now consider a few things that I contend are not coincidences, and represent the real impetus behind the transaction:

1) In March 2006, Del Monte purchased The Meow Mix Company, LLC, a manufacturer and marketer of cat food and cat related products, from a private equity consortium for $705 million, or approximately 2.8x revenue.   In July of the same year, Del Monte acquired the Milk Bone Dog Food Business, maker of dog biscuits and chew treats, from Kraft Foods, Inc. for $580 million, or approximately 3.2x revenue.   All told $1,285 billion in deal consideration for approximately $433 million of pet related revenue.

2) As of May 2010, sales from the Pet Products business of Del Monte on a latest twelve months (LTM) basis were $1.75 billion, or 46.8% of total revenue.   More significant, Earnings Before Interest Taxes and Depreciation (EBIT) for the Pet Products business  on an LTM basis were $355.5 million, or 70% of total EBIT and 61.4% of total product EBIT (backing out corporate overhead).  In short Del Monte is a pet company from a profit standpoint.   Applying an 8.0x multiple to these profits yields a valuation of $2.84 billion or 57% of deal value. [post publishing note: In their analysis Deutsch Bank valued the pet business at 11.0x, which would mean the pet business constitutes over 75% of deal value]

3) In January 2010, KKR purchased Pets at Home Ltd., the largest pet retail chain in the United Kingdom for $1.55 billion.  Del Monte only derives 6% of total revenue from foreign markets.   In short, KKR has been bitten by the pet bug in a significant way, and its Pets at Home acquisition provides an immediate outlet to increase foreign sales of Del Monte brands.

Net net, this deal was not about canned goods, it was a bet on the macro pet market.  The Del Monte acquisition, when closed, would constitute the second largest consumer focused pet deal on record, after Nestle S.A.’s $12.1 billion acquisition of Ralston Purina Company in 2001.   What happens from here remains to be seen.  It’s hard to believe the buyout firms won’t separate the two businesses in an effort to unlock further value, but there’s no guarantee.   A standalone Del Monte Pet Products business could go public at a premium multiple in favorable market conditions.

/bryan

 

 

 

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