Hicks Muse Passes Pinnacle To JPMP –

JPMorgan Partners has agreed to acquire Pinnacle Foods Corp. from Hicks, Muse, Tate & Furst in a $485 million deal. By selling the pickle and frozen-entree outfit Hicks Muse will realize a return of more than two times its invested equity. JPMorgan, already a 7% stakeholder in the business, teamed up with Pinnacle Chairman and CEO Dean Metropoulos, who was brought in during the Hicks Muse purchase in 2001, to buy the company. The deal is expected to close sometime in the fourth quarter.

Pinnacle Foods, comprised of Vlasic Pickles, Swanson frozen foods-maker of the one-and-a-half pound Hungry Man dinners -and Open Pit barbecue sauce, is based in Mountain Lakes, N.J. The three brands, which have undergone a major overhaul as part of the Hicks Muse portfolio, take in roughly $600 million of revenue annually.

“[With Hicks Muse], the first part of our effort was to turn the business around,” Metropoulos said. “Swanson and Vlasic represent a significant opportunity for a platform company, and now [under JPMorgan] we expect to move forward with acquisitions.”

To acquire Pinnacle, JPMorgan topped bids by GTCR Golder Rauner and J.W. Childs Associates. JPMorgan will look to finance the deal with roughly $300 million of leverage, consisting of a mix between senior debt and bonds, underwritten by J.P. Morgan Chase & Co. and Deutsche Bank. The remainder of the purchase price, approximately $185 million, will be in the form of equity.

Pickles and Pancakes

Although J.W. Childs did not emerge on the winning end of the bidding, and purportedly exited the auction prior to the final round, the firm still remains in play with regards to Pinnacle. Among the potential add-on targets Metropoulis has identified, JPMorgan is considering linking Pinnacle up with Aunt Jemima parent Aurora Foods Inc., the embattled food company that in July agreed to a $925 million recapitalization by J.W. Childs.

“We’ve had some discussions of a three way partnership,” Metropoulis cited. “Although if it doesn’t happen that way, it wouldn’t happen,” he added, quashing rumors that JPMorgan may trump J.W. Childs’ current offer on the table. Aurora Foods also controls the Van de Kamp’s frozen fish and Celeste frozen pizza brands.

“The Best Tasting Pickle Ever Heard?”

In Hicks Muse’s original acquisition of Pinnacle-then the North American assets of Vlasic Foods International-the firm agreed to pay $370 million for the property in a bankruptcy auction, a bid that topped a competing offer from H.J. Heinz Co. Pinnacle was once a part of the Campbell Soup Co., and Hicks Muse first became familiar with its brands when it pursued a purchase of the assets through its International Home Foods portfolio company in 1998, after Vlasic Foods was spun out from the soup maker. Vlasic subsequently filed for bankruptcy protection in 2001, which opened the door for the Texas-based buyout shop to move in later that year.

Hicks Muse contributed $135 million in equity to finance the acquisition, while JPMorgan and Lexington Partners each took minority stakes of 7% each, contributing identical $15 million equity provisions.

At the time of the purchase, Hicks Muse had intended to use Pinnacle as the platform from which to initiate a buy-and-build strategy. However, those plans quickly dissolved as the firm came out on the losing end of two bids for Unilever’s Mazola corn oil unit and its Gorten’s frozen fish line. In a more high profile defeat, Hicks Muse saw its proposed deal to acquire Kraft Foods’ Claussen pickle brand vetoed when the FTC ruled against the transaction citing competition concerns.

“We could have won the auctions,” Hicks said of the firm’s bids for Mazola and Gorten’s, “But we weren’t willing to pay too high a price.”

Regarding the FTC’s decision to block the Claussen deal, Metropoulis cited, “It was very frustrating and ended up costing us a lot of business…It’s amazing they would consider a couple of pickle companies to be so important, but they did.”

However, despite the misses, Pinnacle was able to add King’s Hawaiian Enterprises to its stable, which allowed the company to further develop its microwave-bowl food products.

And even though Hicks Muse was unable to follow through on its consolidation plans, the firm was still able to bite into a healthy profit upon its exit, thanks in part to the successful turnaround of the company. The firm will more than double its $135 million equity investment and achieve an IRR up in the high forties, according to Hicks.

“We were able to make significant cost cuts to the Vlasic brands, and were able to turn around Swanson, which was losing both market share and revenue when we bought it… it was like catching a falling sword,” Hicks noted.

The lucrative sale of Pinnacle represents the second successful exit for Hicks Muse in as many months. In July, the firm, along with Apax Partners, floated Yell Group on the London Stock Exchange in an IPO that should net the sponsors returns of more than two times their equity investments.

For JPMorgan, the firm still sees a great opportunity in Pinnacle. Stephen Murray, a managing director with the firm, said, “We believe there’s additional room left in the turnaround [of Pinnacle], particularly on the Swanson side, and there’s also an opportunity to build the business by adding other brands.” Murray said at the end of JPMorgan’s investment horizon, typically five years, he expects Pinnacle will become “a couple billion-dollar [revenue] company.”