With a sagging stock price and disappointing underlying performance, I wanted to share my thoughts with B&G foods management (particularly CEO Ken Romanzi) on how to create the most shareholder value from here. Here is the play by play:
- IPO Green Giant as a separate company
- Use the capital from the Green Giant IPO / Spin to delever Core B&G
- Cut the aggregate dividend, focus on share repurchases & M&A with more flexibility
Here is the open letter. Note I haven’t actually sent this to them, but it is my view on what should be done. Hopefully they consider some of these items.
As you can see in the chart below, B&G’s stock price performance has been abysmal. Investors are concerned over the mature brands in your portfolio, the changing landscape within grocery stores, and that your leverage will prevent you from being flexible. I do believe your portfolio has strong characteristics and like so many other things, investors are likely overestimating how fast these changes will occur and underestimating the power of your business (both its cash value and brand value of Green Giant).
But at the end of the day, you are getting no credit. You are definitely not getting credit for the value of Green Giant and the turn-around story the team commenced. Green Giant was acquired at the end of 2015… but your share price has suffered meaningfully since then.
I personally believe Green Giant has tremendous platform value and would be more appropriately valued as a separate company. Once separated, I think both Green Giant and the legacy business would be much better served and have more appropriate capital structures that would allow growth. I therefore recommend the following “game plan” for the team:
- Spin-out / IPO / float Green Giant as a separate company
- Distribute capital back to B&G, which will be used to delever the core business
- Cut the aggregate dividend, focus on share repurchases or accretive M&A when appropriate
Spin-out / IPO / float Green Giant as a separate company
There is no doubt in my mind that the acquisition of Green Giant has been a success, despite some pressure on the shelf-stable side of the business. With the growth of the frozen category, you have created a formidable opponent to Birds Eye. As summarized in the table below, the aggregate Green Giant business has grown despite significant pressure in shelf-stable and I think 2020 is set up well with cauliflower crust pizza, vegetable hash browns, and veggie gnocchi launches. There will also be further growth as grocery stores expand the freezer aisles at the expense of the center aisles.
As of right now, you are getting no credit for this brand.
Let’s look at a group of comps that also include mature businesses, some of which are experiencing low-to-no growth. When compared to B&G – they trade well above. The reason B&G trades so low is that the “core” or legacy business drags everything else down because it is mature and under pressure. Also, people view the dividend at risk so they might as well get out now. Lastly, leverage of B&G is well above its peers. As discussed further in this note, each of these concerns could be assuaged by spinning out Green Giant.
The names that are growing should trade at a premium. Based on this, I think Green Giant should be worth at least 12-13x, which seems reasonable given the trends in frozen vegetables, consumer demand, and the ability to add more to the business from a platform perspective. Offsetting it will be its “shelf stable” Green Giant business, but that could serve as a source of cash to help fund the growth of the freezer business. At the end of the day, if Kellogg and General Mills (which face secular demand pressure in cereal), then so should Green Giant (again perhaps a premium given the growth story). Bob Evans was acquired by post for 15.4x or 12.5x post-synergies. The play there was a pure-play refrigerated sides, frozen food, and breakfast sausage business. I think this is an excellent comp for Green Giant and shows other avenues it could expand into.
Here is my breakdown of the current B&G enterprise value (TEV). Note, I’m using an estimate for net debt based on the company’s refinancing that occurred in October (post quarter-end):
If we assume Green Giant grows top line 3% next year and assume 19% EBITDA margins, that implies we are getting the rest of the business for ~8.0x.
Why does a spin make sense?
First, you should get better value for Green Giant. As shown in the comps, Green Giant seems cheap. Second, you should get more value for the cash flow. B&G currently trades at a 12% dividend yield. The market is clearly implying the dividend will be cut. And as I will say later, you might as well cut it and buyback stock if you’re not getting credit for it. This leads me to the second part of the recommendation:
Use the capital from the Green Giant IPO / Spin to delever Core B&G
First, we should look at a reasonable capitalization for Green Giant. I think given the growth of the business, its strong brand, and opportunity for further product tack-ons, plus where the comps trade – I think 13x is reasonable. The company could raise 4.5x of leverage (which would only be 35% of TEV) and the balance would be an equity raise.
Does this make sense? Well comparing it to what the company would do in FCF, it foots to a 6% FCF yield to equity- which seems fair.
More importantly, I’ve provided a summary of what we think the impact on the legacy B&G business and capital structure would be:
So first, this would reduce leverage at core B&G considerably. Second, if the stock still traded at 8.0x EBITDA then that foots to ~$930MM market cap.
If we generate $109MM of FCF on this new EBITDA number, that would foot to a 12% FCF yield… If your cost of equity is 9%, then a 12% FCF yield essentially implies a 3% decline in perpetuity. That could be reasonable, but if you (as management) think that is unreasonable you could deploy cash to buyback stock. At the end of the day, the point is that you will be more flexible. You could use cash the way you see fit – buybacks, dividends, pay down debt.
A 6.3x business that is struggling organically is much more risky to investors than one that is 3.5x that can be stabilized and generates gobs of cash. That is why you are getting no credit for the dividend today. Hopefully this analysis gives you some sense on how the two businesses when separated could be significantly de-risked and also provide breathing room to grow.
This leads me to the next recommendation…
Cut the aggregate dividend, focus on share repurchases & M&A with more flexibility
The problem with dividends is that they are viewed as sacrosanct. If you cut the dividend, you’re stock will get punished. However, a dividend policy established many years ago may not be right for this environment. I think Green Giant should almost pay no dividend. Instead focusing on M&A that may enhance its portfolio or opportunistically repurchase shares. Invest for growth.
The legacy B&G could pay a large dividend to entice yield-hungry buyers (e.g. 4-5% yield), but also have flexibility for share buybacks or M&A. You cannot honestly tell me you do not wish the dividend quantum was lower right now so you could repurchase shares or have more flexibility for M&A today. Again, give yourself the capital allocation flexibility – buybacks, M&A, dividends, pay down debt. Put the power back in your hands.