Del Monte Foods (NYSE:DLM) has gotten considerable criticism, some from yours truly, for not doing enough to improve returns on capital or put its cash flow to good use. While it's clearly too soon to say whether management has gotten back on the right track, it's certainly not sitting on its hands.
The company announced Thursday morning that it would buy the Milk-Bone business from Kraft (NYSE:KFT) for $580 million in cash. Though Del Monte Foods will need to take on debt to do the deal, management says that cash flow from the newly enlarged business should be sufficient to pay that down in roughly three years.
Since there are no publicly traded pure plays in the pet food trade, nor complete financials on the Milk-Bone business, I can speak only generally about the purchase multiples involved. Del Monte Foods seems to be paying more than three times sales for Milk-Bone, but right away there's a shortfall to this metric -- Milk-Bone's margins are apparently "well in excess" (according to the press release) of Del Monte's current margins. From management's comments on the conference call regarding EBITDA multiples, the price seems more reasonable.
I've got to briefly play the wet blanket here. Del Monte Foods does do well with its pet-food business, but I'm still nervous about the recent acquisitions. The company made a big purchase from H.J. Heinz (NYSE:HNZ) a while ago, with mixed results -- good in pet food, not so good in people food. I'm also skeptical when I hear management yammer about "iconic brand equity" and how they bring "real value to this brand." That sort of consulting jargon just leaves me cold.
Still, it's hard to deny that buying Milk-Bone gives the company a roughly 50% share of the pet snack business. Capturing a 40% or greater share of any consumer-staple category is usually a tipping point toward real leverage and performance. If the company really can boost its overall margins by incorporating Milk-Bone into the business, it should be a boon to Del Monte Foods' cash flow for years to come.
Further fresh Foolishness on the Del Monte brand:
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
