October 9, 2013
Interviewed by: David Snow
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Deal Stories: Reinventing Frozen Food and Candy

Dan O’Connell, CEO of Vestar, tells how his firm won big with frozen-food company Birds Eye. Joan McCabe explains how Brynwood won big with DeMet’s, a candy company. This video is required viewing for anyone seeking to understand how private equity firms are creating value in the food space. With expert commentary from William Spizman of RSM.

Dan O’Connell, CEO of Vestar, tells how his firm won big with frozen-food company Birds Eye. Joan McCabe explains how Brynwood won big with DeMet’s, a candy company. This video is required viewing for anyone seeking to understand how private equity firms are creating value in the food space. With expert commentary from William Spizman of RSM.

Deal Stories: Reinventing Frozen Food and Candy

Investing In Food & Beverage Brands

David Snow, Privcap: We are joined today by Bill Spizman of RSM, Dan O’Connell of Vestar Capital Partners, and Joan McCabe of Brynwood Partners. Thank you for joining Privcap today. All of you are very active in the food sector and have great stories to share about value add and the ability of private equity firms and your clients to transform the operations of these companies and position them for a very profitable exit. Why don’t we start with a couple of stories from Dan and then Joan.

Dan, your firm Vestar is known for a number of high profile deals, but one is Birds Eye, the packaged foods company. Can you tell us about how the opportunity came up, what your thesis was and how you’ve worked with the management of that company to improve it and turn it into a more valuable company?

Dan O’Connell, Vestar Capital Partners: Birds Eye was a tremendously fun, fun deal – but it didn’t actually start out that way. We had a tough couple of years when we first invested. The company was called Agrilink and it was controlled by the largest farmer’s co-­‐op in the U.S. called ProFac. They had acquired Birds Eye because they wanted a vehicle to sell more vegetables under the Birds Eye name. But they had paid a little bit too much for it and they borrowed all the money so they were a little overleveraged. So they hired a banker to help them raise about $175 million dollars to fix their balance sheet and they wanted to bring in a firm that had done things in the food space andthe consumer packaged goods space. They met with a number of firms and we ultimately succeeded at that.

But we were fifty/fifty investors with the farmers and we had control of the board but they had substantial participation. And our strategy was initially based on a consulting firm we had hired to help us do the deal. They did both private label and branded. And the frozen vegetable category was basically a flat mundane category. Branded was in a gradual decline, private label was increasing, with not a lot of value added, not a lot of innovation in the category. So our strategy initially was to ride the private label side and hopefully have that provide leverage with the big retailers. So we went on that path for the first eighteen months, two years and EBITDA went from about $120, $125, to about $80 million. So we were not doing very well.

But luckily one of our long time consultants and someone who had focused on the food industry, a guy named Kevin Mundt joined our firm two years into the deal. We asked him to go on the board and he came to his first board meeting and he said, ‘We’re going to sample every product at lunchtime, how about that?’ We had a kitchen near the boardroom so we all sampled it and we said we’ve got a quality problem here. So we began to improve the quality and then Kevin’s suggestion, and this is an example of private equity value add. He was a student of the food business but particularly frozen and refrigerated, had done some work for some firms over in Europe and he knew that frozen and refrigerated was a more developed category over there for whatever reason. And so he hired a specialized consulting firm and with the management team, trekked over to Europe and met with the Birds Eye of Europe and other manufacturers over there, and most of the retailers. He then came back with the idea of a steam platform in a bag and steamed vegetables.

Initially we thought it would bring more taste and quality and freshness, but convenience was the hidden jewel in there. So we developed the product over a six, nine-­‐month period. We locked up the packaging for the U.S. only could do it for three years, that’s all we could negotiate, but it gave us a lead over the competition. And that became groundbreaking or disruptive technology in a sense in the food space. But what we learned over a couple years is that convenience was more important or as important as freshness and quality and taste. Our CEO Neil Harrison did a fantastic job; he joined us from Heinz. He developed a whole sonar map in terms of where he could take the steam platform in terms of adding starches to the vegetables and then ultimately meals and snacks, etc.

But it was really a wonderful transaction but the key thing was innovation, that when you invest in a legacy brand that maybe has real brand equity, you need to have not just one round of innovation, but a whole series of them too, because they very quickly get copied by the competition. So that was that. That was the story.

Snow: And of course I’m going to imagine you had to put a significant investment of time and capital into developing the steaming innovation.

O’Connell: Oh sure, probably to develop the product was $25 to $50 million. And the key thing was supporting it with advertising. So we grew the EBITDA from when we first launched, probably $80 million to about $140 to $150 million. But our advertising budget had gone from probably $6 to $10 million in the year we launched, up to about $50 million.

So from a premarketing standpoint, the EBITDA was two and a half times. And we’d have constant debates at board meetings about when Green Giant was going to launch their competitive product and when Private Label was

going to start copying us. And we had what we called our defend steam fresh kitty, and some years it would mean that we would perhaps do, you know, five percent, ten percent less EBITDA, but we felt that we were building for the long term.

Joan McCabe, Brynwood Partners: You know, it’s fascinating that you were able to find that disruptive technology. I think that’s what’s interesting. You know, I probably would have made the mistake of saying go with private label because that’s what conventionally we-

O’Connell: Oh we did do that, it wasn’t working. Now private label works

McCabe: I would have done the same thing.

O’Connell: Yeah but what’s interesting. We did get hit by the lightening stick a little bit. But it was my partner Kevin Mundt who had a global perspective in terms of innovation around the world and he was aware of the fact that was more innovation in this category and it was a growing category. By the way when we filed to take the company public, ultimately Pinnacle bought it and it was just a key part of Pinnacle’s IPO which was very successful.

But the dynamics and the category changed dramatically. All of a sudden frozen vegetables became really in trend in that 2002 to 2009 period when we owned it, it became really an in trend category. It began to grow at a three, four, five percent rate and branded began to really pick up share, private label probably got to, you know, 40 to 45 percent of the category when we were a couple years into the investment. By the time we exited, Private Label was down into the thirties and branded was growing. But it you don’t find that every day. It’s unique and you’re always searching for those in your next deal.

William Spizman, RSM: Innovation is though, a critical element of growth because you just can’t hammer on the old product to continue to provide the growth. Innovation will provide and I think there’s a trend for prepared meals, there’s also the trend for private label, but there’s more profit in the trend for prepared meals. The price point isn’t as sensitive because of the labor. Someone is looking at that versus going out to a fast food restaurant. That’s much healthier, where the fast food restaurant isn’t healthy, probably more price competitive and private label is not an option for them.

Snow:  Joan, can you tell us about an experience that your firm Brynwood had with a candy company? I would love to hear about your firm’s approach to adding value through the prism of that story.

McCabe: Yes. As I said, we generally like to buy corporate orphans, corporate brands that are being disposed by larger companies. And we currently have

a candy business called DeMet’s Candy and it’s comprised of four brands that we purchased from Nestle. We bought the Turtles brand, interesting in that situation because

Snow:  Is that a candy bar?

McCabe: It’s now a candy bar, but when you talk about innovation, it was originally just really chocolates, very small, a corporate orphan from Nestle. We bought only the U.S. business, they kept the Canadian business and it was a business that was burdened with a unionized plant that was operating at fifteen percent of capacity in Canada. And so we agreed to buy the U.S. business, take over the plant in Canada, the union and oh by the way, close that plant.

We built at a Greenfield facility at the cost of thirteen millions to us on a purchase price that wasn’t a lot larger than that. So invested heavy in the business to innovate and we took it from what was essentially a boxed seasonal chocolate business to every day ninety-­‐nine cent bars. As Bill said, imitation is the highest form of flattery. Our form of innovation is less groundbreaking and more just giving the consumer what they want, stand up boxes that maybe you can open up and have only six turtles in them. So we went to Costco and we found something Dave would like, a macadamia nut cluster.

Snow: ProHawaii, that’s good.

McCabe: Yeah. And you know, when you were a fairly small business getting a twenty million dollar from Costco, an order from Costco for twenty million dollars can really augment the throughput of the facility, add jobs to the business and add to the profitability. So the business at this time has four brands doing very  well in our  Greenfield  facility. And from  the time of investment, it went from about $8 million of EBITDA to about $35 million. And it’s not rocket science like the steamers technology, but it was about working with retailers and innovating for the consumer.

O’Connell: Joan, what changed from a management standpoint there.

McCabe: We put in place a whole management. These were corporate orphans but we just bought the trademark so we start with renting a facility. But it’s interesting, our first business was Flips, which was about $25 million in sales and about $3 million of EBITDA and then put the Turtles business on top of it, we still have about twelve people in our corporate office. So there’s a lot of operating leverage, you can get in the lower-­‐middle market to grow these brands.

Spizman: I was thinking if you were an owner of the business and you got a $20 million dollar contract from Costco, you would say, ‘How am I going to staff up for that, how am I going to finance that?’ When you’re a private equity firm and you’re private equity backed, you can say we clearly have the financing and equity to do $20 million dollars of additional business, it’s no problem. So it’s kind of an advantage that you can bring to the table.

McCabe: Well that’s a good point Bill. We always say that we don’t overleverage our businesses because for small businesses, you do have large revolving credit needs, seasonal, working capital. And then the vicissitudes of small business, you can lose a $20 million dollar as easily as you can get it. So we never want to be in a situation where we’re over-­‐levered or in default. That is why for businesses our side we need to get our gains from operating improvements – not deleveraging.

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