Most companies that are more than $870 million in debt do not pay $155 million to acquire new businesses. Or encourage others to follow their business plan. But if you listen to B&G Foods President and CEO David Wenner, he'll advise you to do just that.
“This is what other people in the food business should be doing,” he said.
Don't be confused: Wenner knows what he's doing. He's been running the Parsippany-based company since 1993. Last year, it netted more than $700 million in sales by manufacturing, selling and distributing a diversified portfolio of branded shelf-stable foods across the U.S., Canada and Puerto Rico.
The company also grows its business through debt-financed takeovers, averaging about one acquisition per year over the last 16 years.
Domenick Celentano, an adjunct professor at several New Jersey schools, says the business plan makes sense — even if the dollar signs don't seem to quite add up.
“There's no right way to grow in the food business — B&G Foods picked one, and it's working for them,” Celentano said.
He would know.
Celentano started working for his family's business, Celentano Bros. Inc. — known for its frozen prepared meals — as a teenager. Forty-five years later, he's still at it.
As founder of The Foodpreneur, an advisory firm, Celentano works with foodies to commercialize ideas, helping them bring products to shelves by assisting with packaging designs, pricing, social media campaigns, identifying marketing segments, entering new channels and more.
He also teaches entrepreneurship and marketing at several universities in New Jersey and writes as the Food & Beverage columnist for About.com.
And in looking at B&G Foods, Celentano sees a lot of sense in the strategy.
For one thing, B&G Foods focuses on brands of food staples you'd typically find in the center of a grocery store — consumer-packaged goods.
“B&G looks at non-perishables … items that have long life spans,” Celentano said. “People are always going to eat soup, crackers, syrup … That's one strategy — looking for products with consistent sales.”
B&G Foods also looks for outdated yet profitable brands with history and recognition. Such brands include Ortega, Baker's Joy, Cream of Wheat, Emeril's, Las Palmas, Polaner and more.
“We reinvigorate and contemporize brands with new products to make them more relevant to today's consumers while maintaining profitability,” Wenner said.
Lastly, B&G Foods is one of the few companies that acquire multiple brands through single acquisitions.
“Fragmentation is not attractive to most companies, but we're comfortable with it,” Wenner said. “We look at (these companies) as very good economic buys.”
Recent acquisitions include brands such as Pirate's Booty (acquired in 2013 for $195.4 million); Rickland Orchards (acquired in 2013 for $57.5 million); and even non-food items such as Static Guard and Kleen Guard (acquired through Culver Specialty Brands/Unilever in 2011 for $326 million).
And its $155 million dollar acquisition of Specialty Brands of America just closed last month.
“We paid a little over seven and a half times” the company's EBITDA — or earnings before interest payments, taxes, depreciation and amortization are subtracted — Wenner said. “That's a relatively inexpensive purchase these days. It's not unusual seeing businesses sold at nine, 10, 12 times the EBITDA.”
Still, for a company that, according to Bloomberg data, increased its total debt to $871 million as of December 2013 — an increase of almost $240 million within the year — such acquisitions seem unnecessarily high-risk.
Not so, says Celentano.
“Just by default, a small company needs to be innovative — B&G is not an innovative food company,” Celentano said. “Debt-financing provides less pollution of equity and better returns for investors.”
Wenner couldn't agree more.
“The debt is extremely manageable because interest rates are incredibly low — even if (rates) went up, with the debt levels we're at today … after we pay our taxes, after we pay interest, after we spend money on capital, over 60 percent of our EBITDA turns into free cash flow,” Wenner said. “We pay decent proportions of that out in dividends and then either put the rest on the balance sheet or pay down debt.”
The plan is working.
B&G Foods increased its quarterly dividend rate 3 percent to $0.34 per share within the first quarter of 2014. Two months ago, the five-year shareholder return in the company was more than 700 percent.
“We've created tremendous value for our shareholders … with the right (mergers and acquisitions),” Wenner said. “So there's no reason to do anything other than what we're doing today.”
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With more than 20 percent of B&G Foods employees located in New Jersey (its headquarters is in Parsippany and there are facilities in Roseland and Williamstown), it seemingly would make sense for B&G to manufacture more of its products in-state.
Though the cost-advantages of moving manufacturing into New Jersey are not compelling enough, B&G would consider another option.
“What we likely could do, and certainly the opportunity presents itself … is if we buy brands and their products are appropriate to move into existing manufacturing facilities in (New Jersey) — we would do that,” President and CEO David Wenner said.