Del Monte Foods Company LBO Deal Report
Del Monte Foods Company (DLM or â€˜the companyâ€™) is one of US's largest producers, distributors and marketers of premium quality, branded pet products and food products for the retail market. It is the worldâ€™s sixth largest manufacturer of preserved food, and the leading producer of both preserved fruit and preserved tomatoes . Its pet products segment includes brands like Meow Mix, Kibbles n Bits, Milk-Bone, 9Lives, Pup-Peroni, Gravy Train, Nature's Recipe, Canine Carry Outs, and Milo's Kitchen, while its food products segment includes brands like Contadina, S&W, and College Inn. It sells these products to the retail markets via grocery chains, club stores, supercenters and mass merchandisers; and also to certain export markets, the foodservice industry and other food processors. In FY2010, at 53.2% of $3739.8MM total revenues, the food products segment was marginally larger than the pet products segment. The pet products segment had however out-performed the food products segment by recording an annual revenue growth of 4.6% compared to 1.9% for the food segment over FY2009 figures . With almost 95% of its revenues coming from the US market , DLM has a huge reliance on this market and thus faces the risk of its revenues being severely impacted by the performance of the US economy and changes in US consumer behaviour. Challenging economic conditions have forced consumers in the US to become â€˜value shoppersâ€™, thus leading to the growth of discounters and private labels. Although the US consumer products industry has shown stable growth over the years, companies like DLM are increasingly facing high competition that makes it harder for companies to differentiate their products in a saturated market like the US and at the same time demand prices that could cover costs and provide margins. DLM thus recorded only 2.8% growth in revenues in the US market as compared to 9% growth in the foreign markets between FY2009 and FY2010. Furthermore, DLM also faces risks from shortages and price increase of inputs, commodities, and other raw materials. However, the picture is not all that gloomy and certain categories such as pet foods offer opportunities for higher margins and higher growth due to the growing importance of â€˜humanizationâ€™ of pets. This trend has been the key driving factor in the growth of the pet market and has allowed for increase in sales of value-added pet products that can be sold at premium prices. Also, a 9% growth in the foreign markets, primarily driven by emerging markets like Latin America shows that DLM has significant possibilities to grow and capitalize in these markets.
As of end of the 2010 fiscal year, DLM had a D/E ratio of 0.7 with $1260.8MM of debt and $1827.4MM of shareholders equity (Appendix 3.f). With a 41.8% growth in earnings over FY2009, DLM had $244.3MM in earnings with a net income margin of 6.5%. The company had 199,731,660 common stocks and 11,781,956 exercisable options outstanding, thus making a total of 211,513,616 diluted shares outstanding. DLMâ€™s dividend policy dictated a dividend payout every quarter and the aggregate dividend paid out for FY2010 was $37.6MM. The quarterly dividend paid out on stock outstanding for the first quarter of 2010 was $0.04 per share and $0.05 per share for the rest of the year. The annualized dividend was thus found to be $0.19 per share with a yield of 1.7%. At $13.6 share price as on November 18th 2010, the day of the announcement of the LBO, the market value of equity was $2,870.54MM.
By analyzing the accounting statements for the last 3 years it is seen that DLMâ€™s D/E ratio has consistently declined from 1.2 in 2008 to 0.7 in 2010 (Appendix 3.f). For this the company had reduced its long-term debt from $1,854.8MM in 2008 to $1,255.2MM in 2010 and increased its total shareholdersâ€™ equity from $1,500.5MM to $1,827.4MM respectively. Over the same period, the earnings for the...
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