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Birds Eye sees an IPO as way to eat up its debt

Birds Eye Foods Inc. plans to use the proceeds of an initial public offering to repay debt, a filing with the Securities and Exchange Commission shows.

As of June 27, the company had $323 million of borrowings outstanding under a Birds Eye Credit Facility and $381 million outstanding under an Opco Credit Facility.

The company announced last Friday that it plans to raise as much as $350 million through the sale of its common stock, a filing with the Securities and Exchange Commission shows. The deal is being underwritten by JP Morgan Securities Inc.

The filing does not give a share price, say when the offering is expected to occur or state which exchange the stock would trade on.

Perinton-based Pro-Fac Cooperative Inc. owns 40 percent of Birds Eye, while Vestar Capital Partners Inc. in New York City owns 55 percent. Company management owns 5 percent, the SEC filing shows.

Joseph Ryan, director of research at Brighton Securities Corp., was not surprised by the news of the planned offering, noting that raising capital by selling stock may be a more effective method in the current market.

He noted that Vestar has a history of paying itself back by reducing debt a few years after taking a leading ownership role in firms. The Birds Eye announcement goes along with that strategy, he said, because it would allow Vestar to cash out some of its investment while maintaining a majority ownership.

Birds Eye is one of the most recognized frozen vegetables brands in the United States and has 54 percent unaided brand awareness, according to data reported in May and included in the IPO filing. Birds Eye is No. 1 in market share with 26.5 percent in the U.S. frozen vegetables category.

Profit, sales grow
Birds Eye reported net income of $54 million on revenue of $936 million for fiscal 2009, which ended June 27. That compares with net income of $38.1 million on revenue of $868.3 million for fiscal 2008. The company has had sales growth of nearly 20 percent over two years, the filing states, since sales for fiscal 2007 were $782.7 million and it posted a net loss of $40.4 million for that year.

Since fiscal year 2006, Birds Eye has expanded its frozen vegetables portfolio with the introduction of 23 new product offerings and supported its line of complete bagged meals with 16 new product offerings. As a result, 15.4 percent of the company’s net sales in the frozen food group for fiscal year 2009 and 17.9 percent of those sales for 2008 were generated by products not sold two years before.

The firm’s frozen food group, which includes Birds Eye frozen vegetables and Voila! and Steamfresh complete bagged meals, accounted for 69.2 percent of fiscal 2009 net sales. The company’s specialty food group accounted for 29.9 percent of fiscal 2009 net sales. The remainder was for Birds Eye’s industrial-other segment, which includes frozen industrial vegetables for a limited number of customers.

Birds Eye’s top 10 customers accounted for some 64 percent of net sales during fiscal 2009, with its largest customer, Wal-Mart Stores Inc., representing 25 percent of sales.

The company’s top branded competitor in the frozen vegetables category is Green Giant. Its top branded competitors in the bagged meal category include Bertolli and Stouffers brands.

Birds Eye expects to expand its position in the market, the filing states, continuing to deliver value by leveraging the iconic Birds Eye brand and leading U.S. market share, providing quality products at competitive prices and developing new products.

Birds Eye spent $3 million in fiscal 2007, $3.7 million in fiscal 2008 and $4 million in fiscal 2009 on internal product development and improvement of current offerings.

Birds Eye officials confirmed the filing but said management would make no other statements related to the offering at this time.

The company’s headquarters is in the Linden Oaks Office Park in Penfield. It employs 1,700 people at various locations across the United States. Last year, Birds Eye reported 220 local workers.

Neil Harrison, 56, has served as Birds Eye’s chairman and CEO since July 2008. Prior to that, he held executive positions at Atkins Nutritionals Inc., H.J. Heinz Co., Miller Brewing Co., PepsiCo Inc., General Foods Corp. and Unilever PLC.

For fiscal 2009, Harrison earned $740,235. Of that, $699,987 was his salary and $40,248 was other compensation, the filing shows.

Pro-Fac ties
Ryan noted that the news could have a positive impact locally, especially for Pro-Fac members who would recognize a return on its investment.

"I don’t see it having a negative impact here," Ryan said.

Kevin Murphy, Pro-Fac’s vice president of member relations, said he and other Pro-Fac members were busy early this week reading through more than 100 pages in the offering, trying to figure out how it would affect them. He had no further comment.

Birds Eye has a long history with the cooperative. Pro-Fac formed in 1961 to supply Curtice Burns, a processing company formed that year by the former Cooperative Grange League Federation when regional canneries struggled after World War II.

Curtice Burns grew into a publicly traded firm with strong regional brands. Morton Adams became the CEO nine months after its formation and remained in the post until retiring in 1975. At that time, the company had well-known brand names and $200 million in sales.

Agway Inc., the successor to the Cooperative Grange League Federation, sold Curtice Burns to Pro-Fac in 1994. The cooperative represents more than 500 growers, including many in Western New York.

Pro-Fac changed the company name to Agrilink Foods Inc. in 1997 and reorganized to try to reduce debt taken on in the 1994 purchase. Agrilink bought the Dean Foods Vegetable Co.-and the Birds Eye, Freshlike and Veg-All brands-in 1998, doubling the size of the company.

Heavy debt led to a decision by Pro-Fac to sell a majority stake to Vestar for $175 million in 2002. Pro-Fac has received $10 million annually as part of the agreement.

In 2003, Agrilink became Birds Eye Foods. Three years later, Birds Eye decided to sell its non-branded food business to Allen Canning Co. of Siloam Springs, Ark. That segment included plants in Brockport, Bergen and Oakfield, where 366 people were employed.

Like Ryan, other local watchers of the company believe Birds Eye’s IPO could benefit this area.

"It’s always good to see more public companies," said Christopher Carosa, president of Carosa Stanton Asset Management LLC.

The move could grow Birds Eye’s business, he said, noting that when a firm goes to capital markets, it tends to expand faster. That could lead to a need for a bigger administrative staff at its local headquarters.

In addition, having another locally based public company helps draw attention to the region, Carosa said.

"If the company makes news, especially good news, and that news is picked up by, say, CNBC and the executives are shown being interviewed from the Rochester area, that’s exposure that’s good for the region," Carosa said.

Carosa said this is a good time for the offering with the stock market improving over the past few months. In addition, investors may be anxious to invest, he said.

"You wouldn’t do an IPO when the market is falling like a knife," he said.

Dennis Lohouse, principal of Bryce Capital Management LLC, said he had not expected the IPO announcement, noting that until the past couple of months, it has been a difficult market to float equity. But the market has improved, he said, and the company may be trying to take advantage of the upturn.

"They may think it’s a good market for their stock," Lohouse said.

Lohouse said that if Birds Eye plans to use the money raised to pay down debt, it probably means either that the company is having a difficult time raising additional capital or that the cost of the debt is so high that equity would be a cheaper alternative.

Despite those reasons, Lohouse said a public offering would improve Birds Eye’s cash flow because interest payments on debt would drop or cease.

"This may just be a financing move, and operations would continue as is," Lohouse said of the public offering.

10/16/09 (c) 2009 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303.

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