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Del Monte to buy Meow Mix, sell two divisions

Analyst: Move may not be enough to compete with major pet food rivals
Del Monte Stops Growing Pineapples In Hawaii
Among Del Monte's brands are its namesake canned produce and StarKist tuna.Tim Boyle / Getty Images
/ Source: Reuters

Del Monte Foods Co. on Thursday said it would buy cat-food maker Meow Mix Holdings Inc. for $705 million and sell its private-label soup and baby food businesses to focus on its higher-margin branded businesses.

The company also announced quarterly profit that beat analysts estimates, helped by lower interest expense. Del Monte shares were up 1.7 percent in afternoon trading on the New York Stock Exchange.

Del Monte — whose pet food brands include 9Lives, Snausages and Kibbles ’n Bits — will acquire Meow Mix from New York-based private equity firm Cypress Group, which acquired the business in 2003 for $425 million from J.W. Childs Associates LP.

Del Monte came very close to buying the business in 2002, when Nestle SA sold it to assuage regulators’ antitrust concerns, Richard Wolford, Del Monte CEO, said in an interview.

The price would have been less than what Cypress paid a year later, but at the time, Del Monte had no pet food business to absorb Meow Mix. The company bought H.J. Heinz Co.’s pet food businesses later that year.

The Meow Mix acquisition adds heft to Del Monte’s pet food business, which could help it compete with larger companies like Nestle SA, which makes Purina pet food and Mars Inc., which makes Whiskas.

But the added heft might not be enough, one analyst noted.

“We would have preferred management to give more cash back to shareholders rather than pay a premium multiple (2.9 times sales) for another pet food business where it does not have scale vs. Nestle,” David Nelson, analyst at Credit Suisse, said in a research note. He rates Del Monte shares “neutral.”

Higher profit margins
Pet food typically has higher profit margins than some of Del Monte’s other businesses. The company said the acquisition of Meow Mix, which had revenue of about $250 million in 2005, would add 1 percentage point to its gross margins.

Del Monte said it expected to get about $23 million in tax benefits from the deal.

At the same time, the company said it will sell its soup and Nature’s Goodness baby food business for $268 million to TreeHouse Foods Inc., a pickle and nondairy creamer company spun off last year by Dean Foods Co.

TreeHouse said the acquisition would increase its sales to about $1 billion from $700 million.

The Meow Mix deal is expected to close in the first quarter of 2007 and the sale of the soup and baby food business is expected to be completed in the fourth quarter of this year, Del Monte said.

Del Monte said it expects Meow Mix acquisitions to offset any dilution from the soup and baby food sale in the first year after the deal, and to be meaningfully accretive in the second year.

Del Monte, which also makes its namesake canned produce and StarKist tuna, posted profit of $51.9 million, or 26 cents a share, in the third quarter ended Jan. 29, compared with $48.5 million, or 23 cents a share, a year earlier.

Analysts on average forecast 21 cents a share, according to Reuters Estimates.

Sales rise
Sales rose 2 percent to $878.5 million. The company raised prices to help offset higher costs, but lost some business as a result.

Pet food sales rose 1.9 percent to $227.3 million, with profit in the unit up 22.5 percent from a year earlier, when it had a legal expense.

Consumer products sales rose 2 percent to $651.2 million, but profit fell 5.4 percent in that unit due to higher steel and energy costs.

The company also forecast fourth-quarter earnings of 18 cents to 23 cents a share, on a 1 percent to 3 percent sales increase. Analysts on average forecast 23 cents, according to Reuters Estimates.