How Has Highly-Leveraged Del Monte Pacific Ltd’s Recent Big Expansion Panned Out?

Del Monte Pacific Ltd (SGX: D03) is a company that had expanded its business in a big way in recent years.

The expansion was the acquisition of the US-based Del Monte Foods in February 2014 for US$1.675 billion. While Del Monte Pacific and Del Monte Foods share similar names, they are not related.

Del Monte Pacific had bought over Del Monte Foods from a consortium of private equity investment firms, including KKR, a renowned private equity firm. Interestingly, Del Monte Foods was bought by the investment firms in 2011 for a sum of US$5.3 billion.

The Del Monte Foods acquisition allowed Del Monte Pacific to penetrate the US canned foods business. Del Monte Pacific is well-known for its Del Monte brand of canned pineapples. It also manufactures other types of canned fruit and vegetable products. Del Monte Foods on the other hand, owns the Del Monte brand rights for processed food products in the United States and South America.

Another interesting aspect about the Del Monte Foods deal is the dynamics of the canned foods industry in the US. Data from market researcher Euromonitor showed that canned and preserved food sales in the US had fallen from around 6 million tonnes in 2003 to less than 5.75 million tonnes in 2013. Consumer preferences in the US are shifting toward fresh foods.

To finance the acquisition of Del Monte Foods, Del Monte Pacific had loaded up on debt, as shown in the table below:

Del Monte Pacific leverage table
Source: S&P Global Market Intelligence.

Based on the firm’s latest financials (as of 30 April 2016), it has a total debt to shareholder’s equity ratio of 598%, up from 63% at end-2013. Generally speaking, an increase in debt would ramp up the financial risks a company is facing, all things being equal.

But, Del Monte Pacific’s foray into the US has improved both its top- and bottom-line. In the year ended 31 December 2013, Del Monte Pacific brought in US$492 million in revenue and US$16.1 million in profit. In the financial year ended 30 April 2016 (Del Monte Pacific changed its financial year in 2014), Del Monte Pacific’s revenue and profit were US$2.27 billion and US$51.5 million, respectively.

Meanwhile, Del Monte Pacific has recently implemented moves to reduce costs in its US operations, such as closing a North Carolina manufacturing plant. But, it remains to be seen if Del Monte Pacific’s big acquisition of Del Monte Foods would ultimately be a success, especially given the leverage involved and the change in tastes amongst the US population.

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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 Ong Kai Kiat doesn't own shares in any companies mentioned.