History Pinnacle Foods Group is a food packaging company specializing in shelf-stable and frozen food categories. The company was formed in 1998 as Vlasic Foods International, acquiring several food-manufacturing brands such as Swanson TV dinners and Open Pit from the Campbell Soup Company. Pinnacle’s portfolio of iconic brands dates back in existence to the 1800s. The earliest brand owned by Pinnacle Foods, Armour Star, has existed since 1867 when Philip Armour founded it as Armour and Company. Armour was the first company to produce canned meat and was once Chicago’s most important business, helping to make the city and its stockyards the center of the American meatpacking industry. Throughout the late 1800s and 1900s, iconic brands such as Duncan Hines, Log Cabin, Aunt Jemima, and Hungry Man were introduced and now are a part of the Pinnacle Foods name. Pinnacle Foods acquired Aurora Foods in 2003 when the company’s health was in jeopardy due to lawsuits in 2001.
Ian Wilson, a former executive with Coco-Cola, founded Aurora Foods in 1995 using the company to purchase Van de Kamp Seafood from Pillsbury along with several other brands. As a result of major lawsuits in 2001, Wilson and other Aurora executives plead guilty to securities fraud for misrepresentation of the company’s financial statements. Jim Smith replaced Wilson as CEO of Aurora Foods until 2002, at which time motions were set in place that leads to Pinnacle’s acquisition of Aurora. Pinnacle closed Aurora’s Missouri offices and moved them to Cherry Hill, New Jersey where the currently remain. In 2007 The Blackstone Group, a New York City private equity firm, bought Pinnacle Foods for $2. 16 billion (G. S., 2007). Since then, Pinnacle Foods has acquired Birds Eye Foods, Inc., adding a mix of frozen and specialty brands to its already iconic portfolio. Industry Overview * Ashley Company Overview Today Fortune Magazine ranks Pinnacle in the Top 1,000 Companies with over 4,000 employees. Pinnacle’s products can be found in more than 85% of American households and are leaders in their respective categories, holding the first or second market share position in 10 of the 12 of the categories in which they compete.
Pinnacle currently focuses on growing its “leadership brands” while reinvigorating its “foundation brands”. Their leadership brands are those with the most potential for growth and innovation. These include brands such as Vlasic, Duncan Hines, and Ms. Butter-Worth’s. Pinnacle prides itself on debuting category breakthroughs with these brands. These leading brands are used prominently in marketing campaigns that celebrate their robust vitality. Pinnacle’s foundation brands are those that have a strong and recognizable reputation in most households. Families already know and love these brands such as Aunt Jemima Frozen Breakfast, Open Pit, and Hungry-Man. Pinnacle strives to raise the bar with these familiar foods through new flavors and health benefits. Pinnacle must be innovative with these familiar brands to ensure they remain as popular as they currently are. Financial Overview Financially, Pinnacle has experienced minimal growth over the last year. Net sales increased marginally from $2. 47 billion in 2011 to $2. 48 billion in 2012 and in North America specifically, net sales grew a meager 1% from $2. 07 to $2. 08 billion. EBIT was $284 million in 2012, after giving effect to $66 million in pre-tax charges related to restructuring and refinancing. This restructuring also impacted net earnings, as Pinnacle had to pay $51 million in after-tax charges and was left with $53 million in net earnings. Despite these charges, this net income shows a strong recovery from 2011 when the company suffered a net loss of $47 million. Total capital expenditures were $78 million in 2012, down from $117 million in 2011. These expenditures include footprint consolidation. A summary of these figures can be seen below in Exhibit 1.
Exhibit 1: Pinnacle Financial Statements It can be seen in Exhibit 1 that Pinnacle has a substantial amount of acquisition, merger, and other restructuring charges. These charges are primarily related to Pinnacle closing facilities in Washington, New York, Wisconsin, and Delaware. A complete breakdown of these expenditures has been included in exhibit 2.
Exhibit 2: Acquisition, merger, and other restructuring charge One of the problems that Pinnacle currently faces is their large amount of debt. They have roughly $550 million of a term loan that is due in 2014. This resulted in Pinnacle entering the market with a $300 million incremental term loan last year, dubbed F, with proceeds to be used to help repay the $550 million. Pinnacle has an additional $400 million E term loan that was syndicated earlier in 2012. This loan matures in October 2018 and is covered by a 101 soft call premium until April 17, 2013. Proceeds from that deal were used to issue $199 million in 10. 625% subordinated notes due in 2017. Altogether Pinnacle has about $641 million outstanding under the extended term loan due in 2016 (Bisbey, 2012). This is one of the primary reasons for Pinnacle’s IPO, as will be discussed later in the report. The balance sheet below summarizes Pinnacle’s debt obligations as well as their assets and equity.
Exhibit 3: Pinnacle’s Balance Sheet for 2011 and 2012 After performing a two-finger analysis of this balance sheet it can be concluded that Pinnacle has not made any drastic changes over the past two years. Assets have decreased slightly but that was coupled with a decrease in liabilities by roughly the same amount which is reasonable.
Exhibit 4: is a portion of Pinnacle’s cash flow statement that helps explain these changes in the balance sheet. Pinnacle’s cash flows from financing increased 212% between 2011 and 2012, the vast majority of this expenditure being the repayment of debt. By making a number of loan repayments, Pinnacle decreased their cash and therefore their assets, while also reducing their liabilities.
Return on Equity
Return on Assets
Return on Sales
Exhibit 5: 2 IPO The food-industry sector is changing due to increased globalization, vertical integration, and mergers and acquisitions. This is forcing many firms to look to alternatives to debt financing in order to keep up with the competition. A public equity market is a valuable option in financing the growth necessary to survive amongst competitors, as it offers access to more equity capital than could be attained from other sources (Stegelin & Houston, 2007). With millions of dollars in debt obligations coming up due in the next few years, it is understandable that Pinnacle is having an Initial Public Offering to raise capital. This follows suit with research that has shown that as a food-industry firm’s leverage ratio increases, the likelihood of an IPO increases as well (Stegelin & Houston, 2007). It has also been noted that the probability of a food-industry firm IPO decreases with the firm’s size and age (Stegelin & Houston, 2007). Pinnacle is currently 15 years old which is incredibly “young” compared to industry leaders Kraft and Kellogg which are both over 100 years old.
This could be a contributing factor to why they are wanting to go public. This IPO will follow 13 other offerings in 2013 backed by financial sponsors such as private-equity firms. These 13 other offerings can be used to loosely predict the success of Pinnacle’s IPO, as Pinnacle is backed by private-equity firm Blackstone. These IPOs were successful, seeing an average first-day gain of 22% and are up an average of 21% from their listing dates. These results are promising in comparison to 30 other IPOs at large, showing an average 15% first-day gain and a gain of 19% from the listing dates (Driscoll, M. 2013). Another important benchmark is the IPOs of other food sellers. There were mixed results regarding the success of food seller IPOs in 2012. The health food sector showed strength with natural food companies Annie’s Inc., Natural Grocers by Vitamin Cottage Inc., and WhiteWave Foods Co. performing well since their IPOs. Annie’s shares have more than doubled since being listed last March while the value of Natural Grocers has risen over 40% since their listing in July (Driscoll, M., 2013). On the other hand, Roundy’s Inc. and Amira Nature Foods Ltd. have underperformed since their IPOs.
Roundy’s is a Midwestern supermarket chain and Amira is a rice seller, both of which are down about 20% from their offerings in October and February respectively. Since Pinnacle offers processed, packaged foods, benchmarking their success from the natural, organic food IPOs is not very reliable. With people becoming more and more health-conscious these days, it is not surprising that these health food companies found success in their IPOs. Although Pinnacle does carry the frozen vegetable brand Birdseye, they also carry a number of brands that would not be classified as healthy. Of the aforementioned companies, the most reliable comparison for Pinnacle would likely be with Roundy’s, the supermarket chain. Supermarkets sell a wide variety of processed and pre-packaged foods and are the medium through which Pinnacle’s brands are sold. However, there is still not a strong correlation between the two firms. On March 27th, 2013, Pinnacle announced their Initial Public Offering of 29,000,000 shares of common stock at $20 per share. Pinnacle also granted the underwriters a 30-day option to purchase an additional 4,350,000 shares at the IPO price.
It is estimated that Pinnacle will raise net proceeds of about $545. 2 million after subtracting underwriting costs. Pinnacle plans to use the entirety of these earnings to pay off some of their debt. They plan to redeem $465 million in aggregate principal amount of 9. 25% Senior Notes due in 2015 at a redemption price of 100%. The remainder of their IPO proceeds, along with some cash on hand, will be used to repay $119 million of the senior secured term loan B facility maturing in April 2014. IPO Success Pinnacle Foods had a very successful IPO on March 28, 2013. The company issued a total of 33,350,000 shares of common stock, including the entirety of the additional 4,350,000 shares that the underwriters had the option to purchase. Pinnacle now has a total of 117. 2 million common shares outstanding. Net of all underwriting discounts, Pinnacle raised $627 million through this offering, which is $81. 8 million more than they had initially anticipated. Pinnacle will couple this money with $40 million of cash on hand to pay down $667 million in outstanding debt. Instead of their initial plans of repaying $119 million of their term loan B due next April, they will repay $202 million.
Exhibit 6: Pinnacle Foods’ Stock Performance Since IPO as Compared to S&P 500 As can be seen in Exhibit 6, Pinnacle shares (blue line) seem to be experiencing steady growth since its IPO on March 28, 2013. This is especially positive since the S&P 500 (brown line) seems to be doing quite the opposite. Pinnacle shares have increased from their low of $22. 15 to a high of $24. 61, an 11% increase.
Driscoll, M. (2013, Mar 25). Pinnacle is hoping investors feel hungry. Wall Street Journal. Retrieved from http://search.proquest.com/docview/1319182111? accountid=13803 G., S. S. (2007).
Black stone Chows Down On Pinnacle Foods Group. (cover story). High Yield Report, 18(7), 1-15. Stegelin, F., & Houston, J. (2007).
Factors Influencing the Initial Public Offering (IPO) Decision of Food Distribution Firms. Journal Of Food Distribution Research, 38(1), 215-216. Stratton, K. (2012).
Pinnacle Foods Group Gets 55,000SF Update in Parsippany. National Real Estate Investor Exclusive Insight, 8. Bisbey, A. (2012).
Pinnacle Foods Shopping $300M Incremental TL. High Yield Report, 23(34), 28. PRNewswire (2013, Apr 3).
Pinnacle Foods Inc. Announces Successful Closing of its Initial Public Offering. ttp://investors.pinnaclefoods.com/phoenix.zhtml?c=223400&p=irol-newsArticle&ID=1803206&highlight=PRNewswire (2013, Mar 6).
Pinnacle Foods Finance LLC Reports Fourth Quarter http://investors.pinnaclefoods.com/phoenix.zhtml? c=223400&p=irol-newsArticle&ID=1795035&highlight= Business Wire (2013, Mar 27).
Pinnacle Foods Inc. Announces Pricing of its Initial Public Offering. http://investors.pinnaclefoods. com/phoenix.zhtml?c=223400&p=irol-newsArticle&ID=1801326&highlight=http://www.rttnews. com/2088372/pinnacle-foods-raises-net-proceeds-of-627-mln-i