J.M. Smucker Co. is adding Milk-Bone dog treats and Meow Mix cat food to its stable of human-food brands, with a $3.2 billion agreement to buy Big Heart Pet Brands that also marks a win for the smaller company’s private-equity owners.
The deal gives Smucker, maker of Pillsbury baked goods and Folgers coffee as well as its namesake fruit spreads, a presence in the market for pet food and pet snacks. Sales of those products totaled $21 billion in the U.S. in 2013 and have been growing relatively quickly as Americans lavish ever-more money on their growing number of dogs and cats, as growth in the packaged-food has stagnated.
Under the deal, Smucker will pay 17.9 million shares and $1.3 billion for Big Heart. It also will take on Big Heart’s $2.6 billion in debt, a balance-sheet hit that concerned some analysts.
“There’s a lot of opportunity here,” said Richard Smucker, the company’s chief executive and a member of its founding family. He said Smucker expects efficiencies from the combination of businesses, given that they use some of the same ingredients and share about 80% of their retail customers.
He conceded there are challenges in the pairing, but he compared it with Smucker’s 2008 acquisition of Folgers, which made Smucker the biggest coffee maker in the U.S. “Obviously there is a lot we need to learn about the pet-food business,” he said. “But there was a lot we didn’t know about the coffee business when we got into that.”
Smucker expects the addition of Big Heart to add $2.4 billion to its sales in the fiscal year ending in April 2016. Before the deal, analysts surveyed by Thomson Reuters were expecting sales of $5.7 billion, on average, for that year.
Shares of Smucker, which have risen 13% in the past year, were up 3.3% Tuesday in after-hours trading at $109.35, Big Heart’s owners, who will end up with a 14% stake in Smucker, also are betting that the 118-year-old company will succeed.
Big Heart, then known as Del Monte Corp., was taken private in a roughly $4 billion buyout in 2011 by KKR & Co., Vestar Capital Partners and Centerview Partners. The company last year sold its well-known canned food business to a Philippines-based business. The U.S. Del Monte used the $1.7 billion in proceeds to pay down debt taken on in its buyout and changed its name to Big Heart.
Based on Smucker’s closing price Tuesday of $105.88, Big Heart’s owners have roughly doubled their money on the 2011 Del Monte buyout. The KKR-led group put $1.7 billion in cash toward the purchase and used debt to fund the remainder of the purchase price, according to securities filings. The buyout group will get $1.3 billion in cash when the sale to Smucker closes as well as 17.9 million shares that are worth about $1.9 billion.
Buyout firms aim to double their money or better on corporate takeovers, and in accepting stock as payment KKR and its partners are betting that the Smucker-Big Heart combination will be a hit with investors and sweeten the firms’ returns.
Such a gamble paid off in a big way for KKR late last year after it agreed to take shares as big part Walgreen Co.’s payment for European pharmacy giant Alliance Boots GmbH. Walgreen shares soared after the deal was struck, adding more than $10 billion to the haul of KKR and its partners in that deal.
The pet-food industry, which had $73 billion in global sales in 2013, is dominated by two other companies better known for their human food. Nestlé SA had about 35% of the U.S. market as of 2013, according to Euromonitor International. Mars Inc. last year acquired Procter & Gamble Co.’s pet-food brands for $2.9 billion, giving it about 23% of combined market share. Big Heart ranked third with about 13%
As part of Smucker’s deal, Dave West, CEO of Big Heart, will lead Smucker’s pet-food business and be nominated to Smucker board upon the deal’s closing, the companies said, which is expected by May 3.
Credit-rating firm Standard & Poor’s said the proposed deal could have negative implications for some of Smucker’s existing debtholders. “We believe that Smucker’s willingness to fund a large acquisition mostly with debt is a departure from its historically conservative financial policy,” wrote S&P analyst Bea Chiem. She added that the deal, which will significantly increase Smucker’s debt load, results in a “meaningful deterioration” of the company’s credit metrics.
By Annie Gasparro and Ryan Dezember. Gillian Tan and George Stahl contributed to this article.