CD&R Feeds On Brake Bros. –

Clayton, Dubilier & Rice recently completed its $967 million acquisition of Brake Bros. PLC, adding the European-based food supplier to its menu of portfolio companies. The deal represents a return for CD&R to the food space, and is also part of a greater trend of LBO firms moving into the food industry as a whole.

Brakes, which caters to the UK and French markets, took in earnings of _40.0 million in 2001, before taxes, goodwill, amortization and other special charges, on revenues of _1.388 billion. Since 1986, when the company first went public, Brakes has shown uninterrupted yearly revenue growth, and for all but one year, has seen steady jumps in its annual profits. CD&R Principal David Novak cites the stability of the company – and the industry in general – as a major factor in attracting the firm’s interest.

Novak also notes that CD&R is extremely comfortable working within the food service industry, coming off of its successful exit of Alliant in 2001. The company purchased Alliant, formerly Kraft’s foodservice unit, from Philip Morris in 1995 for $690 million. In 2001, the firm exited the company with a $2.2 billion sale, including the assumption of $750 million in debt, to Royal Ahold. (CD&R received the Buyouts’ Exit of the Year Award for the sale in 2001.)

CD&R, which acquired Brakes through CDRP Acquisition PLC, a specially created acquisition vehicle, paid roughly $967 million, including debt, for the company. CD&R confirmed that it provided _270 million of equity and assumed _175 million of Brake Bros. high-yield debt. J.P. Morgan Chase and Credit Suisse First Boston agreed to supply the financing in three pieces, including a _220 million senior term-loan facility and two revolving loan facilities totaling _75 million. CD&R fashioned the deal to provide a long-term stable supply of capital, but at the same time allow it the flexibility to invest in Brakes’ future growth.

The firm’s offer beat out separate bids from Deutsche Bank and BNP Paribas. Novak said CD&R’s previous experience with Alliant allowed the firm to focus on due diligence and price the transaction accordingly.

Novak said the firm’s long-term goal is to create the Pan-European leader in the food distribution industry. While the company is already the largest distributor of frozen food in the UK and France, the firm intends to expand its reach across the continent, through acquisitions in countries such as Germany and Spain. CD&R’s short-term goal for Brakes, however, is to complete the integration of previous acquisitions, primarily in its France-based operations.

Novak notes that since food distribution is not typically a high-margin business, to succeed a company needs to be best in class. To spur growth at Brakes, CD&R intends to draw on its experience at Alliant, specifically through directing its focus on IT and the company’s sales efforts. Novak explains that a successful information technology program will drive efficiency, through providing real-time inventory stocking figures, tracking rebates and historical ordering patterns and providing web-based interfaces for customers. He also cites research showing that customers who purchase online will typically spend between 15% and 20% more than those who place their orders over the phone or in person.

That said, there are some differences in the European and U.S. food distribution markets that CD&R will have to contend with. In general, the U.S. distribution bellwethers are strictly broadline. In the UK, however, the markets are more fragmented, with the players specializing in different aspects of the business, such as frozen foods and ambient varieties. Brakes, meanwhile, is already recognized as the leader in frozen foods, with a 29% market share in that industry. The company will also focus on its branded products going forward, as that segment provides some of the better margins available in the industry.

The deal represents the first acquisition this year for CD&R’s Fund IV. The fund, which initially closed with around $3.5 billion, now has roughly $1.5 billion left to invest.