Middleby Cooks Up a Deal

Middleby (Nasdaq: MIDD  ) has done it again. Not since former Motley Fool Hidden Gems recommendation TransAct (Nasdaq: TACT  ) agreed to buy rival TPG for 0.6 times sales back in June 2004 has a newsletter pick attempted the sort of coup that Middleby announced yesterday.

According to the firm's press release, this restaurant oven king will pay $26.7 million in cash for food processing equipment maker Alkar Holdings. According to Middleby, Alkar has annual sales of approximately $60 million. Capital IQ, which relies on Dun & Bradstreet to estimate the revenues of tiny private firms such as Alkar, puts the actual figure at $57.4 million. Meanwhile, Alkar's owners publish the figure of $70 million.

Depending on whose numbers you believe, Middleby is therefore paying anywhere between 0.38 and 0.46 times sales. Let's say "0.4 times sales" and call it a day. At that price, this looks like a steal of a deal for Middleby -- an even better discount than TransAct was able to negotiate. When you consider that Middleby sells for a valuation nearly five times what it's shelling out for Alkar, the acquisition looks even better.

For a modest price of $26.7 million, Middleby should net an easy sales boost of 20% next year. That's not even counting any organic growth the company might achieve as well. In comparison, it has taken Middleby the past two years to increase sales by just 15% over its 2002 numbers. And even that growth was not entirely organic, since it included additional sales brought by tiny acquiree Nu-Vu.

With this deal looking so obviously good for Middleby, the question naturally arises: Is it too good to be true? Remember how the TransAct/TPG turned out -- it didn't. If TransAct couldn't finalize a 0.6 times sales acquisition, might Middleby's even better bargain also face a kibosh?

If the deal does fall through, I don't think it'll be Alkar's sellers backing out. Digging further into Alkar's history through the magic of Capital IQ, I discovered that the company originated as a unit of DEC International, which is currently bankrupt. DEC International sold Alkar to private equity firm Facilitator Capital Fund (and other investors) in January 2002 for $18 million. Thus, the sellers in this deal will be netting an $8.7 million profit -- a 48% return on investment. Chances are, all parties concerned consider this a win-win transaction.

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Fool contributor Rich Smith does not own shares of any company named above.