B&G announced its second share offering of 2016.
Could raise more than $200 million.
Another acquisition likely before the end of the year.
Towards the end of Q1, B&G Foods (NYSE:BGS) had a secondary offering, issuing 4.6 million shares at $33.55 and raised a net of approximately $152 million after fees and expenses. This offering was the result of the company’s 2015 Green Giant brands acquisition, an acquisition that had been expected to take the company’s leverage up to 5.6x, and had been discussed months earlier. The only unknowns were the precise timing and the amount. Tom Crimmins, B&G CFO, had given the following information with respect to that pending acquisition:
To finance the Green Giant purchase price, closing inventory adjustment, initial working capital requirements and related fees and expenses, we expect to borrow approximately $870 million during the fourth quarter in the form of an incremental $750 million Tranche B term loan and approximately $120 million of borrowings under our existing revolving credit facility…
After combined financial statements for B&G Foods and Green Giant are available, we will consider issuing common stock in the first half of 2016 to de-lever depending upon market conditions and other factors.
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That 4.6 million share offering took place two weeks after the company had first raised the dividend by 20%, followed by the announcement of 2015 results and 2016 guidance. None of these events did much to help the share price which had traded above $38 immediately prior to increased dividend news. And, although the offering was far less than the 10 million shares I had initially expected, the $35.50 price was in line with my estimate of $35.
For those less familiar with B&G, it is a company that believes in leveraging up the balance sheet to make accretive acquisitions. It then issues new stock to pay down the short term loans and returns a portion of the increased EBITDA to shareholders in the form of a dividend increase. When I first followed the company, they had a targeted leverage of less than 4x.
However, as interest rates continued to decline, they were willing to alter that to less than 5x. On the most recent conference call, it was noted that the «net leverage was approximately 4.6 times pro forma adjusted EBITDA». CEO Bob Cantwell was later asked about leverage and acquisitions during the Q&A, and replied:
It always can change. We took, when we did Green Giant, we were, before the deal, we were around 4.5 times levered, 4.6. We took leverage up to 5.6, 5.7 on a deal the size of Green Giant.
I don’t think today we would look to go above that, and certainly not above six. And the preference and the longer term goal here is to stay below five and stay in the mid fours, if not below.
With that in mind, what should investors make of the following news? On August 12th B&G announced
…its intention to offer 3,750,000 shares of its common stock, pursuant to an effective shelf registration statement filed today with the Securities and Exchange Commission. In connection with the offering, B&G Foods expects to grant the underwriters an option for a period of 30 days to purchase up to an additional 550,000 shares of common stock.
B&G Foods intends to use the proceeds from the offering for general corporate purposes, which could include, among other things, repayment of long term debt or possible acquisitions.
The following day it announced the pricing of that offering was $49 per share and on August 12th the company further announced that it had closed on the offering, and that
…net proceeds to B&G Foods are approximately $179.9 million, assuming no exercise of the underwriters’ option to purchase additional shares. B&G Foods intends to use the proceeds from the offering for general corporate purposes, which could include, among other things, repayment of long term debt or possible acquisitions.
If the underwriters exercise the option to purchase an additional 550,000 shares, it could add another ~$25 million to the $179.9 million net proceeds. Once again, what will B&G do with the proceeds? Since the start of the fiscal year, B&G has paid off the remaining $40 million under its revolver, another $40 million of its Tranche A term loans due 2019, and $110 million of its Tranche B term loans due 2022. And, it also had more than $100 million in cash at the end of the quarter.
There would be a modest interest rate benefit on its term loans if the leverage rate falls below 4, but it seems highly unlikely that would be the objective. Its Tranche A loan requires payment of the balance (which is currently $233.6 million) within three years, but that’s not a reason to run out and raise $200 million today. The company expects to spend an extra $25 million on Green Giant marketing programs in the second half of the year, but that still leaves a lot of excess cash within the company.
The most logical conclusion is that B&G is preparing for another acquisition. Whether that acquisition will be another very large acquisition similar to Green Giant, or whether it is something much smaller remains to be seen. Cantwell gave no indication of a particular preference:
…when we looked at the Green Giant acquisition, we looked at that acquisition where we paid less than eight times EBITDA, and buying an asset. So we get the benefits for cash taxes relating to the asset purchase that it fit into the B&G model that kind of what we thought their EBITDA was, 60-ish percent of that EBITDA was going to turn into free cash flow.
And then as a board, we would be sharing 50%, 60% of that free cash flow back to shareholders in the form of dividends.
So it fit into our model. We did see, certainly more risk on a business that was somewhat mismanaged by the prior owner and was really shrinking fast. But we just saw a lot of opportunities on being able to fix that, and it’s really come together and it’s working.
So when we look at acquisitions, we certainly want a brand, a retail-branded business that we believe in, but it has to be that cash flow model because that’s the model that has worked for us and investors. And that EBITDA needs to turn into 50% to 60% free cash flow day one when we own it. And hopefully we can do the right things and grow the top line along the way, too.
So the model drives the decision. Certainly the brand that we’re buying drives the second part of the decision. But the cash metrics have to work, otherwise, we’re not going to take a risk on that acquisition.
That summarizes what B&G is all about. Making accretive acquisitions and then returning a portion of the incremental free cash flow to shareholders through increasing dividends. The size of those dividends has been a major reason to invest in B&G over the past 5 years, although the recent prices in excess of $50 have made the dividend yield of around 3.5% far less attractive, even if that dividend was recently increased by 20%.
Maybe B&G management is simply taking advantage of favorable stock market conditions to build up a cash hoard. The share price recently hit a new all-time high of $52.84 following an increase in guidance with the Q2 results issued on July 29th. Or maybe management already has its sights set on its next acquisition.
This is not a company that has a history of sitting on a large cash balance. I expect that the cash is already burning a hole in Cantwell’s pocket, and that a new accretive acquisition – and subsequent dividend hike – will soon be announced.
Fuente: Seeking Alpha
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