The Art of the Deal
by sam Gazdziak, Senior Editor
An acquisition may involve plenty of investigation, preparation, and decision-making on both sides of the deal, but a good transaction can benefit everyone involved.
When it comes to action, the processing floor of a meat plant often pales in comparison to the boardroom. That is where deals are made and hundreds of millions of dollars exchanged for companies to change ownership. The meat and poultry industries have seen so many mergers, acquisitions, and consolidations that it hardly can be considered a “trend” — it’s just a part of everyday business.
It’s not just big companies like Hormel and Smithfield Foods involved in the acquisition business, although those two corporations have been extremely busy in recent years. Small or mid-sized companies can be just as active in the market, as can private investment companies with no prior attachment to the food industry.
When a transaction takes place, the acquiring company may issue a statement as simple as “Company A announces the acquisition of Company B. Terms were not disclosed.” The process itself, though, is hardly simple. There are months of investigation and negotiations involved between the buyer and the seller. Even before that, there is much that both sides have to consider.
M&A Blockbusters
Shown here are some of the largest transactions that have taken place in the meatand poultry industries within the last five years.
Acquiring CompanyAcquired CompanyYearPriceNotes
Pilgrim’s Pride Corp.,
Pittsburg, TX
The chicken operations of ConAgra Foods Inc.,
Omaha, NE
2003 $660 million  
Apollo Management L.P.,
New York, NY
United Agri Products,Greeley, CO2003$610 million  
Maple Leaf Foods Inc.,
Toronto, Ontario, Canada
Schneider Corp.,
Kitchener, Ontario, Canada
(subs. Of Smithfield Foods)
2003$378 millionThe price included theassumption of Schneider’s debt.
Smithfield Foods Inc.,
Smithfield, VA
The pork business of Farmland Industries,
Kansas City, MO
2003$367.4 millionSmithfield paid in cash, with theagreement that it would continueto operate all Farmland plantsand maintain production levels.
Hormel Foods Corp.,Austin, MNThe Turkey Store Co.,Barron, WI2001$334.4 millionHormel merged the companywith its Jennie-O division.
Smithfield Foods Inc.,
Smithfield, VA
Packerland Holdings Inc.,
Green Bay, WI
2001$250 millionPrice included stock and the
assumption of Packerland’s debt.
U.S. Premium Beef Ltd.,Kansas City, MO The interest in beef processing business from Farmland Industries,Kansas City, MO2003$232 million A group of investors, led byU.S. Premium Beef, bought Farmland National Beef, the
fourth-largest U.S. beef processor.
This information is courtesy of the Food Institute, which provides merger data and other industry information exclusively to its members.
The FI’s annual Mergers & Acquisitions Study is available for purchase. For more information, visit www.foodinstitute.org/sampmerger.cfm
When should a company sell?
Carl Blackham, managing director - meat protein sector for Harris Nesbitt, Chicago, IL, says that there are many possible reasons for a company to sell all or a part of its business. “Sometimes the sale price of a competitor’s business piques their interest. Sometimes changing market conditions may create a ‘get big or get out’ scenario,” he says. “Sometimes a group of current managers present a leveraged buyout opportunity, or personal or family circumstances motivate the CEO to choose a different focus.
“Catalysts like these aside, though, equity owners should understand that the decision to move forward involves a tremendous time commitment, a process they cannot always control, and a number of emotional issues involving dedicated employees and family members,” he adds.
Family businesses also have the potential problem of succession issues, says Jay Novak, director and head of food and beverage investment banking for Houlihahn, Lokey, Howard & Zukin, Chicago, IL. “Who’s going to take over for me when I die or choose to retire? If the answer is no one, then that’s a potential time to sell,” says Novak.
In a large corporation with many divisions and brands, there may be corporate orphans to be sold off. David Stang, senior vice president of LaSalle Bank’s Food Group, Chicago, IL, says, “We find oftentimes some of the large companies have different areas that they focus on; for example, areas or segments of their markets where they might have a number one or two share.” Along with those areas, though, there may be brands that are no longer a focus.
Maybe those brands used to be a primary focus but have lost that luster. Maybe they are part of a business strategy that no longer fits the company. Whatever the cause, they are corporate orphans. “They don’t get the development, the big dollars, and the management attention to continue to grow them,” Stang says. The parent company may be willing to divest itself of those brands for the right offer.
When considering the state of the company prior to considering a sale, it is also necessary to look at the state of the industry in general, as that can greatly affect the sales price. Emmanuel Durand, managing director at Rabobank, New York, NY, notes that commodity-driven industries like meat and poultry are cyclical in nature. “The moment you get to the top of your cycle, and the cycle starts playing against you, the impact on valuation is important,” he says. “If you feel you are not a consolidator in the long term, but you are in the right part of the cycle, then it’s probably the right time to think about divesting.”
Roger Barr, also a managing director at Rabobank, notes that the financial environment as a whole plays a role in selling a company, as well. “There are times when the credit markets are very accommodating, and there are times when they are closed, and that will have an impact on how many people may be interested in buying and how aggressive they may be on pricing when it’s sold,” he says.
The buyer’s position
Just like there are several reasons for selling a company, there are also several reasons to buy a company. Of course, there are wrong reasons as well, notes Thomas Guido, managing director of Wynnchurch Capital, Lake Forest, IL.
“Too many times buyers acquire for pure scale,” he says. “If this is the only reason, it doesn’t always turn out to be an optimal investment. The key is to make sure that the acquisition is a good fit where management and ownership want to drive the business.”
While every company would love to grow organically, there are often occasions when an acquisition can gain the same result in a much faster time frame. “If you do business on the East Coast but want to do business on the West Coast, how are you going to do that?” LaSalle’s Stang asks. “You could try to develop a customer base and advertise, but it would be easier to buy a competitor out there, and all of a sudden, there you are. Depending on the strategy and, if it’s a public company, what shareholders’ demands are, a quick avenue to faster growth is through acquisitions.”
There is also the matter of timing when it comes to purchasing a company, says Rabobank’s Durand. “At the end of the day, the one who controls the timing is the seller. Once the buyer has defined his strategy and his approach, he must be ready at any time to jump into the negotiations with a potential target.”
Negotiating price is only part of the process, as a company needs to do its homework on a potential target. While looking at the books, sales marks, safety records, and other data is necessary, there is also the more nebulous matter of integrating the corporate culture of the acquirer and the acquired. Sometimes, this just isn’t possible.
“Sometimes, there is not a compatibility in terms of management and people and the corporate culture of the company,” Durand notes. “The integration as a result of that becomes much more painful than anticipated, and the transaction fails because the two cultures are incompatible. We have seen companies with a very defined corporate culture that couldn’t be a match for other companies.”
Durand recommends that a prospective buyer spend a week or two with the selling company’s management in order to learn about how they organize and motivate workers and manage the business. It is also an opportunity to see what would need to be changed, and if that change is even possible.
David Garrity, director, business development for Crusader Investments LLC, New York, NY, advises his clients to understand there will be differences and to handle any issue that develops in a professional manner, so as not to create hard feelings on either side of the transaction. “There’s going to be a period of integration, where one company is absorbing the other company in a manner that allows the companies to become one and move forward in an efficient and effective manner,” he says.
Steak-Umm, under new management
Wynnchurch Capital entered the meat processing industry in 2004 when it participated in the purchase of Steak-Umm Co., a thin-sliced sandwich meat processor from Pomfret Center, CT. Wynnchurch partnered with an executive who had prior experience in the food processing industry.
“We serve on the board of directors, and we support management in making key decisions for the business, both in terms of using capital to grow the business organically as well as capital that might be used for strategic acquisitions,” Guido says of Wynnchurch’s involvement with Steak-Umm.
Wynnchurch covers a number of different industries in its portfolio of companies, ranging from niche manufacturers to business service providers, focused on outsourcing trends to consumer product businesses, like Steak-Umm Co. Steak-Umm was its second food-related purchase.
“We’re looking to make acquisitions that have good risk-return profiles for us as investors. That’s first and foremost,” Guido says. “That entails looking at the valuation of the business, the historical situation, and then assessing what you can do with the business after you own it.”
In the case of Steak-Umm, Guido calls it a company that had strong brand recognition. Wynnchurch and Steak-Umm’s new management saw an opportunity to further extend the brand to other areas, making it more profitable.
This February, the company introduced the Steak-Umm eXpress line of pre-cooked sandwich meats that can be re-heated and placed on a roll. Prior to this, Steak-Umm products had to be cooked by the consumer before being consumed. The four new varieties are cheese steak, sliced steak, beef in BBQ sauce, and meatball mozzarella. Guido says the meats were very popular at the 2005 FMI Show in Chicago.
“We thought having a microwaveable cooked product is a real enhancement in terms of convenience for the consumer,” he says.
Preparing for the sale
If a company is serious about selling, there are some steps management should take to prepare for the sale.
“Equity owners can give themselves greater flexibility to respond if they think like a buyer,” says Charles Adair, managing director, mergers & acquisitions for Harris Nesbitt. “That means taking a rigorous, objective look at many facets of the business, including potential value creation opportunities for a new owner, its ties with customers, and any contingent liabilities that could surface during the due diligence process.”
While the due diligence process will require a potential purchaser to take a long and detailed look at a target company’s financial records, that does not mean that the company should stop all spending. Purchasing a much-needed piece of equipment, while a costly investment, may pay dividends by replacing an antiquated machine or reducing head-count in a department.
Houlihan’s Novak says that taking such cost-saving measures as wage freezes and hiring freezes are not necessary and can actually be harmful to a company in the process of being sold.
“You should continue to run the business the way you’ve always run the business,” Novak says. “That means sometimes making the investment decisions that you would have normally made. No one wants to see a company that’s been starved of resources because that will reduce your purchase price.”
A company’s safety record will also come into play during this part of the acquisition process. “Food safety is probably one of the most important elements now in a food company acquisition,” says Novak. “I’ve seen transactions die because the seller did not have adequate food safety procedures in place.”
The deal goes down
Negotiation of a sale involves more than just coming up with the right price. It also can involve individual negotiations between the acquiring company and key members of the seller’s management team.
“Chances are acquiring entities will want to meet with and evaluate the current management team as part of the due diligence process,” explains Harris Nesbitt’s Blackham. “The impression they create can either add to or subtract from the seller’s leverage. For this reason, it’s important to make sure appropriate compensation arrangements are in place for critical members of the senior management team that provide incentives for them to stay through the transition to the new owner.”
Those agreements can include anything from a three-month consulting transition period to a three-year employment agreement, says Crusader Investment’s Garrity. The acquired company should also be compensated for its participation in the parent company’s business strategy.
Garrity says he was involved with one transaction where a company that had double-digit growth the previous year. It was expected to have similar growth in the current year when it was put up for sale in May. That company wanted the sale price to reflect not only the company’s past success but also its expected success in the future. While the acquiring company couldn’t be expected to pay for growth that hadn’t happened yet, it could structure the transaction to reward the company for achieving that growth after the sale.
“The seller has to understand [the acquiring company] is buying the business today, not on December 31,” Garrity says, “but the acquiring company has to understand the seller is really excited about what’s been going on in the last eighteen months.” The agreement should be structured that if the seller reaches its projected growth, the buyer will pay a bonus. The seller, though, has to take on certain corporate costs, such as training the staff, making technology-related changes, or paying for some advertising and trade show costs. “These are reasonable corporate expenses, but that is a very tough subject for both sides of the table. It takes a fair amount of patience and negotiation,” says Garrity.
Capital expenditures
A company looking to make an acquisition has the difficulty of raising enough cash or assets to close the deal. Fortunately for packers and processors, there are many businesses available to assist them in this process.
“First and foremost, a company should consult their accountant about specific financial concerns and needs,” says Lance King, industry marketing leader for GE Commercial Finance, Danbury, CT. “Then, talk to a financial services company to learn about the products that are available to meet those needs.”
King adds that it is important to find a lender that has both the mindset and expertise to take on and manage asset risk effectively. A lender without that expertise may set unreasonable return conditions or be unable to support customer requirements. Companies looking for financial assistance should ask if the lender understands the business and how the transaction helps them do business.
Among the questions a company should consider are:
• Do I need to preserve credit lines?
• How can I best manage my cash flow?
• What tax or accounting advantages can I benefit from?
“Overall, an asset-based lender can provide meaningful financing alternatives that go beyond simply paying for an asset and ultimately help companies manage to their specific opportunities and challenges,” says King.
Both sides win
Earlier this year, Hormel acquired Arriba Foods from Arbor Private Investment Co. LaSalle’s Stang cites this as an example of a mutually beneficial transaction. “Arbor profitably exited its investment after a couple of years - a normal investment horizon for a private equity firm — and Hormel was able to acquire branded food products for its grocery products division,” he says.
In an ideal situation, a merger or acquisition ends with both parties feeling like they accomplished whatever it was that led them to making a transaction. “For the acquiring company, they bought a business that really takes them strategically in the direction they want to go,” says Rabobank’s Barr. The price was reasonable, there were no unpleasant surprises in the due diligence phase, and the parent company is satisfied that the management team - either the original management or a restructured team -is motivated to move forward.
The sellers, in turn, have accomplished their goal, whether it was to liquefy their investment, gain a broader strategic positioning through a merger with a complementary business, or something else. “Maybe it was a company that had an opportunity but didn’t have the capital to seize the opportunity,” Barr says. “In the process of being acquired, that capital is now available. So exciting things can happen to the business that were limited before the acquisition.” NP
Financial companies participating in this feature include:
• Crusader Investments LLC, call (212) 472-6200, or visit www.crusader.com
• GE Commercial Finance: call (203) 790-2774, fax (203) 796-1388, or visitwww.ge-cef.com
• Harris Nesbitt, call (312) 461-2020, or visit www.harrisnesbitt.com
• Houlihan, Lokey, Howard & Zukin, call (312) 456-4754, or visit www.hlhz.com
• LaSalle Bank, call (312) 904-8413, or visit www.lasallebank.com
• Rabobank, call (212) 916-7800, or visit www.rabobank.com
• Wynnchurch Capital, call (877) 604-6111, fax (847) 604-6105, e-mail wynnchurch@wynnchurch.com, or visit www.wynnchurch.com