JLL Pasta Co. Dripping in Red Sauce –

When it comes to food buyouts, the market has pushed beyond the general flight-to-quality initiative seen in most industries, and taken on more of a flight-to-salutary flavor. For JLL Partners’ portfolio company, New World Pasta, the healthy-living kick presented enough of a breeze to tip the pasta maker into bankruptcy.

However, America’s new favorite low-carb diet doesn’t necessarily deserve all of the blame, as New World Pasta has been beset with problems that go well beyond the Atkins craze. The first sign of trouble came in 2002, when New World announced it had found “inaccuracies” in its financial statements for the 2001 and 2002 periods. The company cited “inadequate system design, integration and implementation” for the blunders and it wasn’t until February of this year-15 months later-that New World finally made bare its preliminary earnings and revenue data for those periods. The company downwardly revised its EBITDA for 2001 to $37 million, and also unveiled EBITDA losses of $20 million and $14 million for the calendar years 2002 and 2003, respectively.

In early April, New World was sent a notice of default from The Bank of Nova Scotia, the lead arranger and agent of the company’s credit facility, which indicated New World had failed to make mandatory principal and amortization payments of $425,000. The company’s total debt, as of the end of 2003, stood at $455 million, while its cash reserve totaled just $6 million. On top of that, New World has been in default with its bondholders since late 2002.

JLL acquired New World in 1999 for $450 million, contributing $140 million of equity to the deal. The firm bought the company, which had been a subsidiary of Hershey’s, with an understanding that the business needed work. At the time, the primary threat was coming from the private-label pasta products, which were eating away at the market share of New World’s Ronzoni, San Giorgio and Skinner brands.

To turn the business around, JLL paired with wholesale pasta supplier Miller Milling Co. in the investment, and through the wholesaler, had expected to increase New World’s access to different markets, such as the ingredient space and the private label niche. JLL also pursued add-on acquisitions, and in August, 2001 paid $43.1 million for a number of Borden’s pasta brands, including Prince and Creamette. However, while the Borden deal boosted New World’s market share, the debt load brought on by the acquisition, as well as integration problems following the deal, have hampered the company ever since. Further complicating the transition, the implementation of a new ERP system in mid-2001 is also partly to blame for New World’s accounting woes.

Moreover, the Atkins Diet craze has blown through the industry, knocking the entire pasta market to its knees. In the first quarter of 2004, retail pasta consumption declined by 7%, expanding on retractions in 2003’s fourth and third quarters of 3% to 4% and 1% to 2%, respectively, according to a report by Legg Mason. Not surprisingly, given the focus on the in-house accounting mess, New World was slow to react and lost market share to its chief rival, American Italian Pasta.

JLL has tinkered with management to right the difficulties, going through four different CEOs in five years, and most recently appointed Wynn Willard to replace interim chief Peter Cotter.

New World announced on May 10 that it has filed a voluntary petition seeking reorganization under Chapter 11 of the U.S. Bankruptcy Code. In conjunction with the filing, the company said it obtained a commitment for a $45 million debtor-in-possession financing facility led by one of its current lenders. The company will gain access to $20 million of that once court approval for bankruptcy is awarded, and New World believes the financing, along with its existing cash flow, will be enough to continue to operate its business.

Most expect that New World will have to unload some of its pasta brands as it reorganizes. Legg Mason, in a note to clients, said, “We suspect that New World Pasta will emerge from bankruptcy as a smaller company, with fewer manufacturing facilities and potentially fewer brands.”

Legg Mason does not anticipate, though, that New World’s bankruptcy will lead to any mass exodus of New World’s customers. The investment bank estimated, “Many of the New World Pasta customers who sought another pasta supplier have found it, and this bankruptcy filing is not a catalyst for a meaningful number of customers to abandon New World.”

It is unclear if JLL will hold any stake in the business when it emerges from bankruptcy. Calls to representatives at the firm were not returned by press time.