Barbarians at the Gate 2.0: KKR Attacks Del Monte Foods

What better way to start off the holiday season than a discussion about a food company buyout? After all, with turkey fresh on our minds and holiday parties to come, a food company’s story is particularly enticing.  How ironic to discover on Thanksgiving Day that Del Monte Foods (DLM) will be acquired!

This time, the company of interest is Del Monte Foods, a company that’s been around the private equity block quite a few times.  The buyers: a group lead by private equity firm Kohlberg Kravis Roberts & Company (KKR), the mega buyout shop that closed the $25 billion deal for RJR Nabisco in 1989, which became the subject of the popular Barbarians at the Gate by Bryan Burrough and John Helyar.  The other buyers include Vestar Capital Partners and Centerview Partners.

Both of the additional buyers have experience in the consumer business: earlier this month, Centerview Partners bought Richeleiu, a frozen food producer, for $250 million.  Vestar Capital Partners also has invested in consumer businesses, including a privatization of Michael Foods at the end of 2003 and a recapitalization of Birds Eye Foods in mid-2002.  We all know Birds Eye: just check out those square blue packages in the frozen vegetables section at the grocery store.

KKR plans to pay $5.3 billion, including debt, for Del Monte, which represents $19 per share or a 40 percent premium over Del Monte’s average stock price over the last three months.  Take a look below to see the stock performance of Del Monte since its IPO in the late 1990s.

The great thing about this story is that it ties nicely with KKR’s original acquisition of RJR Nabisco.  At the time, Del Monte was one of Nabisco’s many brands, and KKR sold it off to a group of private investors in 1991.  Then, in 1997, Texas Pacific Group, now TPG, another mega buyout shop, bought the company from this group.  In 1999, Del Monte went public, and is now going private again!

Del Monte is truly an iconic brand, but not in the way most currently imagine.  The name Del Monte conjures up images of the canned food section at the supermarket, as well as bananas and pineapples.

If you think this way, you’re actually wrong.  Del Monte labels appear on many different types of food brands, but they don’t refer to the Del Monte Foods that KKR plans to take private.  Bananas and pineapples? Those fall under Fresh Del Monte (FDP), which distributes fresh fruits and vegetables.  Canadian canned peaches and corn?  That’s with CanGro Foods, Inc.  The Japanese company Kikkoman even uses the Del Monte brand in its products that it distributes throughout Asia.

Funny enough, we can thank this confusion on KKR itself!  It sold off bits and pieces of RJR Nabisco after the huge buyout, and many of these slivers had Del Monte as part of their name, including the tropical fruits and canned goods businesses.  However, today’s reality revolves around pet food.

Over the past ten years, Del Monte has expanded its pet food offerings through acquisitions, including Meow Mix and Milk-Bone.  As a result, about half of its $3.7 billion in annual sales stems from food-related products.

KKR is on the prowl, literally and figuratively.  Del Monte was the private equity firm’s second pet-related buyout this year, after its acquisition of Pets at Home for $1.5 billion at the beginning of the year.

Why the fascination with food companies, particularly pet food? After all, Del Monte changed its entire business focus while KKR is on a pet feeding frenzy.  First, food companies are ideal targets for private equity companies, who aim to buy out companies with stable cash flows, enabling more debt in the deals.  What about Fluffy’s Meow Mix? Simply put, pet food is has both higher margins and greater growth potential.

This deal is also good for the private equity market in general: bigger and more frequent deals suggest improved credit conditions.  Plus, now these private equity firms are beginning to put their large cash reserves to use.  Nevertheless, it’s unlikely that we’ll soon return to the private equity glory days in 2007, when typical deals ran in excess of $10 billion, versus $5 billion today.

All that’s left to watch now is the “go-shop” period ending January 8th.  Del Monte has from now until then to get a better price.  Otherwise, the deal will close in March.

One more thing: with Del Monte changing hands pretty often, one must wonder who ultimately derives the benefit.  Is it Del Monte shareholders? Or is it KKR and TPG?  On the surface, it looks like these private equity firms are just playing hot potato with Del Monte.  Maybe looks are deceiving.

Disclosure: No positions in the stocks mentioned.