J.M. Smucker makes play for Big Heart Pet Brands
Feb. 4, 2015
by Eric Schroeder
Search for similar articles by keyword: [Retail
Bi Heart Pet Brands' portfolio includes Meow Mix, Milk-Bone, Kibbles ‘n Bits, 9Lives, Natural Balance, Pup-Peroni, Gravy Train, Nature’s Recipe, Canine Carry Outs and Milo’s Kitchen.
ORRVILLE, Ohio — JM Smucker Co. has made a huge move, one of the most transformational in its 118-year history, in agreeing to acquire Big Heart Pet Brands in a cash and stock transaction valued at approximately $5.8 billion, which includes approximately $2.6 billion of net debt.
Big Heart Pet Brands is the largest stand-alone producer, distributor and marketer of branded pet food and pet snacks in the United States. Its portfolio of brands includes Meow Mix, Milk-Bone, Kibbles ‘n Bits, 9Lives, Natural Balance, Pup-Peroni, Gravy Train, Nature’s Recipe, Canine Carry Outs and Milo’s Kitchen.
For a company known for its Smucker’s jelly, Jif peanut butter and Folgers coffee, the move represents a dramatic shift, although the company’s top executive sees the acquisition as “an excellent strategic fit.”
“Our company is about more than making and marketing products,” Richard Smucker, CEO, said during a Feb. 3 conference call with analysts to discuss the transaction. “At Smucker’s, our purpose is helping to bring families together to share memorable meals and moments, and we recognize that pets are cherished members of the family with approximately two-thirds of US households having at least one family pet. This acquisition further supports our purpose as it enables us to now serve the mealtime and snacking needs of the whole family.
“Let me further expand on the rationale behind the transaction and why we are so enthusiastic about Big Heart Pet Brands,” he added. “First, it is a great strategic fit, alighting with Smucker’s strategy to own and market leading center-of-the-store food brands in North America. Second, the acquisition provides greater scale and strategic balance to the Smucker’s portfolio as the pet-food business will become the third platform for growth along with our existing food and beverage businesses. And, third, the transaction is financially compelling. It increases Smucker’s annual net sales to approximately $8 billion while enabling us to capitalize on the growth of the pet food and pet snack category.
“It provides a portfolio with an attractive margin structure similar to that of Smucker’s. It offers significant synergy opportunities, which will result in greater earnings growth in the future and it further strengthens the company’s cash flow,” he continued.
“The acquisition of Big Heart Pet Brands will represent the fourth transformational acquisition that Smucker’s has undertaken in the past dozen years, each of which has taken us into new categories and provided new capabilities. Pet food and pet snacks are staple CPG items that in many respects are similar to the categories in which Smucker currently competes. These include an emphasis on consumer marketing and innovation. Category growth that is being [led] by snacking, health and wellness, and premium offerings, a significant overlap in the customer base and sales channel, which will allow us to leverage our go-to market approach and provide efficiencies for our customers. And the similarities in the supply chain and certain commodities purchased to support these businesses,” he said.
JM. Smucker estimates Big Heart Pet Brands’ net sales will be approximately $2.3 billion and adjusted earnings before interest, taxes, depreciation, and amortization will be approximately $450 million for Big Heart Pet Brands’ fiscal year ending May 3, 2015.
Under the terms of the agreement, JM Smucker will acquire all of the outstanding equity of Big Heart Pet Brands. The company will issue approximately 17.9 million shares of its common stock to the shareholders of Big Heart Pet Brands’ holding company and pay $1.3 billion in cash, subject to adjustment for working capital and certain other amounts. The company also will assume approximately $2.6 billion of net debt of Big Heart Pet Brands, which will be refinanced by the company upon closing.
The transaction includes leased corporate facilities in San Francisco and Burbank, Calif.; and Pittsburgh; and owned or leased manufacturing facilities in Decatur, Ala.; Topeka and Lawrence, Kan.; Buffalo, NY; and Bloomsburg, Pa.; as well as several research and development facilities, sales offices and distribution centers.
The transaction is expected to close by the end of the company’s current fiscal year, which ends on April 30, 2015. JM Smucker expects to incur approximately $225 million in one-time costs related to the transaction, of which approximately $150 million are expected to be cash charges. One-time costs are anticipated to be incurred primarily over the next three fiscal years, with approximately one-half of the costs expected to be recognized in fiscal 2016.
Following the closing of the transaction, the company will have approximately 120 million common shares outstanding, of which approximately 14 percent will be owned by KKR, Vestar, Centerview and AlpInvest. In connection with the transaction, KKR, Vestar, Centerview and AlpInvest have entered into a shareholders agreement with JM Smucker, which sets forth certain post-closing governance arrangements and contains customary standstill provisions and provisions regarding voting rights. Upon closing, each of KKR, Vestar and Centerview will be entitled to designate one board observer to the company’s board of directors, subject to the terms of the shareholders agreement.
Big Heart Pet Brands, with nearly 2,500 employees, is headquartered in San Francisco. The company currently is owned by a consortium of investors led by funds affiliated with Kohlberg Kravis Roberts & Co. LP, Vestar Capital Partners, Centerview Capital and AlpInvest Partners Inc. The company changed its name to Big Heart Pet Brands from Del Monte Corp. following the sale of its fruit, vegetable and other consumer foods portfolio on Feb. 18, 2014.