Questor Cooks Up New Turnaround –

Questor Management is set to take over Lufthansa’s non-airline food division, Chef Solutions. The acquisition is said to be in the $100 million-plus range, according to sources close to the transaction. Terms of the deal-expected to close in June-were not disclosed.

The acquisition of Chef Solutions follows in the Questor tradition of buying underperforming companies. The business, said Questor Managing Director Dean Anderson, has not shown a profit in some time, and given the company’s position as secondary to Lufthansa’s core focus, the food maker was considered expendable by the airline.

Lufthansa hired BMO Nesbitt Burns to run the auction, which drew interest from strategic and financial bidders alike. However, the source said most of the strategic interest was solely in buying the separate divisions of the business.

Chef Solutions operated in the carrier’s LSG Sky Chef airline-food unit. Lufthansa started building the Chef Solutions division in 2000 to supplement LSG’s food business. The push to diversify took a backseat in 2001 when the Sept. 11, 2001 terrorist attacks and the outbreak of the SARs virus conspired to squeeze profits at most airlines. Lufthansa had intended to build Chef Solutions into a $1 billion company, Anderson said, although the airline only managed to find the halfway point of that goal, last recording revenue of $530 million for the fiscal year 2003.

Chef Solutions is split up into three primary businesses: prepared foods such as potato and tuna salad, a bakery division, and a direct-store distribution division, which supplies refrigerated food products to retailers in the Midwest. The company sells food under the Orval Kent, Pennant, Yoder’s and La Francaise brands and operates 14 facilities in the U.S. and Canada.

“Chef Solutions’ products are very important to the perimeter of supermarkets,” Anderson said. “Most of their brands are private-label items sold in the deli counters. As grocery stores struggle to compete with the WalMarts, they use the perimeter of their stores to sell items such as homemade potato salad and baked bread, which helps to differentiate themselves [from the discounters]… Restaurants, such as Red Lobster, and food service companies, such as Sysco, buy these products as well.”

Once the deal closes, Questor will go to work turning the business around. The firm believes improvement will come from efficiencies put in the manufacturing and purchasing processes. Anderson added that many of the company’s financial struggles came from “a difficult ERP system implementation,” and the firm believes that since the implementation is now complete, the company is ready to benefit from its integration.

“In building this company, Lufthansa put in an infrastructure for a much larger business and ultimately wound up with a bloated capital structure,” Anderson said. “Plus, most of the post merger integration [from buying the different brands] has not gone particularly well.”

Once the turnaround is achieved, Questor hasn’t ruled out the possibility of making some tuck-in acquisitions. The firm also sees itself finding organic growth as one of the two dominant players domestically in its market. “There are a lot of mom and pops that operate in this market, but Chef Solutions should benefit from being one of the few national producers,” Anderson said.

Questor used its Questor Partners II, L.P. fund for the transaction. Wells Fargo Foothill is putting together a bridge loan and in time, Anderson said Questor would look to arrange some permanent financing. Kimco Realty is also contributing with some term debt. Questor could not disclose the anticipated debt-to-equity ratio, although Anderson did say the business would not be highly levered.

Anderson could not say exactly how much of the $865 million in Fund II is committed so far, but he indicated the firm expects to begin fund raising for Fund III later this year.

Snap Shot

Buyer: Questor Management

Target: Chef Solutions

Seller: Lufthansa

Purchase Price: $100M+

Advisor: Lufthansa: BMO Nesbitt Burns

Accountant: Questor: PricewaterhouseCoopers