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Release the hounds

4 February 2015 By Kevin Allison

J M Smucker’s $5.8 billion purchase of Big Heart Pet Brands may keep investor activists in Kibbles ’n Bits. The $11 billion owner of Folgers coffee, Jif peanut butter and eponymous fruit spreads should gain bargaining power with retailers by bundling human treats with dog food. But the odd combination may elicit a Pavlovian response from uppity shareholders.

The transaction is predicated on scale. Acquiring Big Heart’s Milk-Bones, Meow Mix, Snausages and other products should allow Smucker to fill more space on grocery shelves and wrangle better terms from merchants. The company promises $200 million of annual cost cuts, explaining the near-5 percent bump in its share price after the deal was announced.

The deal also looks good for the sellers. A private equity consortium led by KKR will pocket $1.3 billion of cash and a 14 percent stake in the combined group. The sale price, which includes debt, exceeds the $5.4 billion of enterprise value they paid to take Del Monte, Big Heart’s predecessor, private in 2011. Throw in $1.7 billion from the 2013 sale of the group’s fruit business, which kept the Del Monte brand, and they doubled their money.

CEO Richard Smucker says snacks for furry friends are a good fit with his own company’s pantry staples, because “pets are cherished members of the family.” He may be confident Smucker can repeat the success of 2008’s $3 billion acquisition of Folgers coffee from Procter & Gamble, which doubled the firm’s size and propelled it to record profits. The risk is that the even larger Big Heart adds hard-to-digest complexity instead.

Of course, this is just the latest change of ownership for Big Heart, which started as a business within the old RJR Nabisco conglomerate – itself the target of the KKR-led LBO and breakup immortalized in the 1989 best seller “Barbarians at the Gate.” If this deal turns out to be a dog, Smucker may also find itself struggling to keep investor activists at bay.

 

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