Del Monte Buy Takes Cypress Out of The Mix

Meow Mix, launched in 1974, posted sales last year of roughly $250 million, using Del Monte’s figure. Cypress puts the figure at around $300 million. Aside from wet and dry cat food, other successful recent products include its Hairball Control Formula. The company trails only Nestle’s Friskies brand in the dry cat food industry.

The story of the Del Monte purchase begins when JW Childs purchased Meow Mix from Nestle’s Holdings Inc. in October 2001 for $160 million after the FTC forced Nestle to sell due to antitrust concerns after its Ralston Purina acquisition. Del Monte looked at the asset then, when it hadn’t yet moved into pet foods, and would also consider buying when Cypress took it over in October 2003, according to one source. Cypress faced a heated auction when it bought and ended up paying $430 million for the asset. After the deal, JW Childs held onto a 10% stake with management also holding a 10% stake.

But immediately after Cypress bought, there was a spike in raw materials costs—soy and corn—along with a drought in the mid-west and Meow Mix’s competitors engaging in a pricing war.

“Several times we were faced with a decision of shutting down spending, firing people and restructuring, just to preserve profitability,” said Cypress Managing Director and head of consumer products investing, Chris Harned, who led the deal. “But instead of backing away and getting desperate, we were tough and threw more money at it.”

That required getting LPs on board. Cypress decided it needed to move ahead with a plan to get into wet cat food a year ahead of schedule. Cypress asked its LPs for additional capital, which they gave, but only begrudgingly. “No one was happy. My team wasn’t happy. My LPs weren’t happy,” Harned recalled. But he insisted to his LPs, “We’re consumer product experts. We’re not going to let a bump in road throw us off our vision.”

By summer 2004, Cypress had skinned the cat. Through the life of the investment, Cypress claims it grew gross sales to more than $300 million from $220 million.

“People think the food industry is mature and it kind of is. But any time you take a brand as strong as Meow Mix and get the right management and capital structure around it, you can do some damage,” said Harned. “There’s so many huge food companies out there with hundreds of different brands and they’re not optimizing anything. You need to grab one of those brands, drive it 24-7 and do everything in terms of marketing and line extensions.”

As for the recent sale, a handful of potential buyers looked at Meow Mix in a process that was organized by UBS. The purchase price multiple for Cypress when it bought the company from JW Childs was around 8x EBITDA, while it sold the asset for an estimated EBITDA multiple of about 13x (not including some tax benefits) and a sales multiple is 2.8x (using Del Monte’s sales figure). The deal is expected to close in the first quarter of next year.

Susquehanna Financial Group analyst Thomas Morabito was one of a few analysts who thought Del Monte overpaid. Morabito said there has been increased competition in the space recently and some had expected Del Monte to exit its own pet food business, rather than grow it.

“Far and away the biggest winner was Cypress Group,” said Morabito. Synergies could lower the price for Del Monte by $20 million, according to one analyst’s estimate. Another $20 million or so could be shaved off for tax purposes.

Concurrent with the Meow Mix deal, San Francisco-based Del Monte announced it has decided to unload its soup and infant food business for around $275 million to TreeHouse Foods, a deal which is expected to close later this year.

In explanation of the two deals, Del Monte said that as part of its “project brand,” through which it wants to commit to higher margin businesses that are faster growing. Del Monte already makes pet foods Pup Peroni, 9Lives, Kibbles ‘n Bits and Snausages. The pet food division accounts for 26% of Del Monte’s sales and 40% of its profits. Combined, the two companies will have $551 million in cat food sales and a 12.2% market share of the cat food industry, according to an estimate by Davenport Equity Research analyst Ann Gurkin. Overall, the combined company will have $1.1 billion in pet food sales.