Post's move on Michael Foods reflects 'rare opportunity'

by Eric Schroeder
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ST. LOUIS — Michael Foods may have nothing to do with Michelangelo, but an interesting comparison was drawn by the head of Post Holdings between Michael Foods and hard-to-find paintings in a recent conference call discussing the decision by Post to buy the producer and distributor of eggs, potatoes and dairy products for $2.45 billion.

“This is really a unique, rare opportunity,” Bill Stiritz, chairman and chief executive officer of Post Holdings, explained during an April 17 conference call with analysts to discuss the transaction. “I have been in the business for over 50 years, and this one stood out. Years ago I remember someone saying that he acquired something. I said, ‘What the hell did you buy that for?’ and he said, ‘Well, Bill, this is a Renoir.’

“You keep looking for these things, (but) they come along so rarely. And this has all the characteristics of this being a superb business. (It has) a great management team and a unique category, and it was offered at a fair price. It fits perfectly with what our job is: To serve the interests of shareholders and debt holders. And, it will create a growing value for the future.”

The acquisition of Michael Foods Group from affiliates of GS Capital Partners, affiliates of Thomas H. Lee Partners and other owners, represents the largest transaction to date for Post, which steadily has padded its portfolio over the past year with such products as protein bars, peanut butter and pasta. In Michael Foods, Post will be acquiring a company with a leading presence in food service, retail and food ingredient channels through such brands as Papetti’s, All Whites, Better ‘n Eggs, Easy Eggs, Simply Potatoes and Crystal Farms.

Bob Vitale, chief financial officer of Post Holdings, said the acquisition continues Post’s transformation and investment behind large secular themes around the increased consumption of protein and around away-from-home breakfast occasions. He noted the transaction presented Post with both compelling strategic and financial rationale.

“First, we have growing categories,” Mr. Vitale said. “We think that based on those secular themes these categories will continue to grow supported by consumer behavior around diet and geographic eating occasions away from home.

“Michael has leading positions in each of these core categories. No. 1 in ag, No. 1 in refrigerated potatoes and No. 1 in cheese in certain regions. That leads to a highly defensible position stemming from that leading share position, and the company has a long-standing track record of innovation and a proven history of being able to defend that cash flow with a long history of growth.”

Additionally, Mr. Vitale said Post was “extremely impressed” with the management team.

“It is a deep and talented team led by Jim Dwyer, a very experienced executive in both C.P.G. and food service,” Mr. Vitale said. “The average tenure of the management team is 23 years in the industry — so quite deep and talented.”

Mr. Vitale also pointed to Michael Foods’ cash flow dynamics, which he called “very attractive.” He said the cash flow will allow Post to both leverage for the transaction and to rapidly deleverage and fund growth.

“It has a strong record of free cash flow and debt pay down under a series of private equity owners,” he said, adding the company has modest capital expenditures and working capital requirements.

“We believe the category, and Michael in the category, will continue the volumetric growth that it has enjoyed and that will lead to substantial cash generation, high accretion to e.p.s. (earnings per share),” Mr. Vitale said. “And we believe the combination of Post and Michael will allow for $10 million in synergies. I want to stress that those synergies are resulting from procurement scale, not from integration within Post because we do view this as a stand-alone opportunity to grow around Michael, not an opportunity to integrate it into Post.”

Mr. Vitale said Post expects Michael Foods’ EBITDA for calendar 2014 to be between $255 million and $270 million.

Since Post has been active over the past year in the private label and nutrition markets, an analyst asked Mr. Stiritz whether the large price paid for Michael Foods would preclude Post from pursuing further transactions, at least for a period of time.

“If there are some opportunities to rationalize what we have there and add some other businesses, I am sure we will find a way to do that,” Mr. Vitale said. “I don’t think this stops us for a second in moving in that area.

“We have the PowerBar business from Nestle that we are working on, and that is an opportunity with an excellent brand that has been under managed and so we have got that to work with. On private label, what we did with the Post cereals, we broke the idea there that a branded food company should not be in private label also. So we can continue there. I don’t think this sets us back in those areas at all.”
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