US: Pinnacle eyes sales, profit boost from Wish-Bone buy
Pinnacle has struck a deal to pay US$580m for Wish-Bone and a second dressings brand, Western, from Unilever.
Discussing the transaction, which Pinnacle expects to close by early in the fourth quarter, with analysts, The company insisted it saw opportunities to grow sales through an increase in advertising, innovation and the possibility of devising "meal solutions" with existing brands like Birds Eye.
The company's senior management also said the deal would be "accretive" in the last three months of 2013. Pinnacle plans to expand capacity at an existing plant, a move it expects to further boost margins.
Responding to questions on the performance of the salad dressings category in the US, Gamgort acknowledged sales had recently come under pressure. However, he insisted the salad dressings sector, in which Wish-Bone is the third-largest brand, behind Hidden Valley Ranch - owned by consumer goods group Clorox - and Kraft, was "attractive".
Gamgort said: "It's had attractive growth rates over the past five years. The industry has had a challenge to have any growth. The total category has grown at about 3.5% CAGR over the past five years." The shelf-stable segment, which Gamgort said accounts for 80% of the category, had grown at 2% over that period.
"When you look over the five years, you see quarters when the category is up and down but fundamentally it has been consistent. We see it very much on-trend. People are continuing to eat healthier. We know a lot about vegetables and vegetable eating occasions because of our number one position in Birds Eye. Salads are the number one vegetable occasion in which we don't participate so being able to have a business that allows us to participate in that vegetable occasion makes a lot of sense."
Analysts welcomed the deal. "We believe Wish-Bone fits nicely with Pinnacle’s logical strategy of restoring neglected brands. Specifically, high retailer and consumer awareness make brands like Wish-Bone a fertile ground for innovation and increased awareness after years of relative underinvestment," Janney Montgomery Scott analyst Jonathan Feeney wrote in a note to clients yesterday.
Unilever will produce the salad dressings at a site in Indianapolis over the next 18 months under a co-packing agreement. Pinnacle has an option to renew the deal for an extra six months.
However, CEO Bob Gamgort said the investment Pinnacle planned to make in its own production capacity would allow the company to drive efficiency from the new assets and accrue savings from the acquisition.
"We will be able to leverage the strength of our supply chain to generate substantial synergies by fully integrating salad dressings production into one of our existing facilities. We plan to invest $40-50m in capacity over the next 18 months to build a new highly-efficient production capability that will ultimately enhance gross margins for the business," Gamgort said.
"Unilever had the Wish-Bone business in a facility that it combined with other manufacturing. They weren't selling that facility as part of the transaction. This gives us an opportunity to take that production and consolidate it into one of our existing sites. That allows us to be a lot more efficient from an infrastructure stand-point and tap into logistics and warehousing synergies," Gamgort said.
"We look at this as a real opportunity to drive the efficiency of it. The plant Unilever was operating had equipment that was reasonably old and operated well below capacity utilisation. This allows us to lay out a brand new set of lines that are high speed and flexible for the size of the business."
CFO Craig Steeneck said the "accretion" Pinnacle expects to see from the deal will be "slight" in the fourth quarter as that is the weakest sales period for Wish-Bone. However, he estimated the deal would boost EBITDA by $35-50m in 2014 and around $65m in 2016 thanks to supply chain savings.
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