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Del Monte Serves Up A US$1.6 Acquisition

DelMonteLogoDel Monte Pacific Limited (SGX: D03) announced that it is going to acquire the consumer food business of Del Monte Foods for US$1.675b, subject to “regulatory approvals and customary closing conditions”.

Del Monte Pacific Limited (Del Monte) is dual-listed on the Singapore Mainboard and the Philippine Stock Exchange. Its products include canned pineapple and tropical fruits, ketchups, fruit juices, and processed vegetables. It also owns the world’s largest fully integrated pineapple operation that consists of 700,000 tons of processing capacity and a 23,000 hectare plantation.

Del Monte Foods (DMF) is a US-based company that is owned by private-equity giant KKR & Co. L.P. It bought the food processor in 2011 for around US$5.3b.

Del Monte Pacific said it would finance the acquisition with:

  • US$80m from the company’s existing cash balance
  • US$350m from the issuance of perpetual preference shares
  • US$150m from the issuance of common shares
  • US$165m from a loan that NutriAsia Pacific Limited – majority shareholder of Del Monte with a roughly 80% stake – has “committed to assist [Del Monte]”
  • US$930m from the issuance of debt to institutions
  • an additional US$350m loan for working capital needs only if Del Monte would require it

DMF’s consumer food business “enjoys leading positions in large and profitable categories that include #1 branded market share positions in the U.S. in major canned fruit and vegetable categories and #2 positions in canned tomato and broth categories.”

Del Monte sees the acquisition as giving the company “significant scale and reach, as well as an opportunity to unlock meaningful synergies.”

Ronaldo Gapud, chairman of Del Monte’s board, commented that the acquisition provides the company “greater access to a well-established, attractive and profitable branded consumer food business in the world’s biggest market [in the USA].” The States was a market that Del Monte did not have any meaningful presence in previously.

Del Monte’s share price has increased by 117% over the past two years, handily outpacing the broader market’s return of only 18% as measured by the Straits Times Index’s (SGX: ^STI) gains.

But, a huge acquisition like this can easily destroy Del Monte’s market-beater status if it’s not handled well.

If we work with Del Monte’s financial numbers for the 12 months ended 31 Dec 2012 and assume that the acquisition was completed by then, the company’s net gearing will have increased from 0.46 to 4.1. This creates additional financial risks for the company’s investors.

There’s also the need to consider whether Del Monte has overpaid for this acquisition. Here are some of the financial numbers for DMF’s consumer food business:

Financial   Year ended April 30, 2011* 2012* 2013*
Sales US$1.88b US$1.81b US$1.83b
Cost of Goods Sold (US$1.41b) (US$1.40b) (US$1.407b)
Operating Expenses (US$127m) (US$124m) (US$147m)
Selling, General & Administrative   Expenses (US$139m) (US$132m) (US$144m)
Other Income/Expense US$1m US$1m US$2m
Operating   Income US$202m US$157m US$135m

Source: Del Monte’s Press Release (link opens a PDF)

We can see that the consumer food business’s operating income has fallen steadily over its last three financial years. Based on current numbers, Del Monte is paying $12.4 for every dollar of the consumer food business’s operating income.

That earnings-multiple does not seem high on first glance, but if Del Monte can’t improve operating efficiencies and the declining trend in operating income continues, the acquisition might turn out to be an expensive mistake.

On that front, Del Monte has commissioned an independent valuation of DMF’s consumer food business and the report will be disclosed in a circular to shareholders in relation to the acquisition.

It would do well for Del Monte’s shareholders to scrutinise the valuation report and come to their own conclusion on whether the acquisition makes economic sense.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.