Launching its latest fund portfolio with a fixer-upper, Wellspring Capital Management recently acquired the Multifoods Distribution Inc. subsidiary of International Multifoods Corp. (NYSE:IMC) for $180 million. The unit sells food products and supplies to vendors like Subway and Quizno’s, yet is best known to market watchers as an underachiever with profit margins at just one-third of where they should be.
“This is a classic Wellspring deal in that we think this is a good company that has been undermanaged,” said William Dawson, a partner with the New York-based buyout shop. “I think it really came down to the fact that this was a distribution business being run by manufacturing guys since IMC is a manufacturing business.”
Wellspring began looking at food distribution companies earlier this year in conjunction with George Holm, a former senior executive with Sysco Corp. and Alliant Foodservice Inc. The idea was that Holm would co-invest with Wellspring, and then be named chief executive of the acquired company. The only problem was finding a suitable opportunity.
“We saw a lot of clean companies out there trading at high multiples, but we were looking for something a little dirtier with low multiples,” Dawson explained. “The deal for Multifoods Distribution started out as an auction [run by U.S. Bancorp Piper Jaffray], but needed so much work that it was just us left by the end of the day.”
Wellspring paid $180 million for the unit, less an adjustment of approximately $14.2 million to reflect working capital at close not a bad discount considering that a Merrill Lynch report listed the unit’s book value at $216 million. The deal is split up with $50 million of equity coming from Wellspring and Holm, and then a $185 million credit facility led by GE Capital. Other debt lenders include Comerica Bank, FleetBoston Financial and PNC. The difference between the purchase price and the debt total will be used for future working capital. The transaction was sold with a 5.6X multiple, following certain non-recurring adjustments.
Multifoods Distribution has 2,500 employees and 27 national distribution centers which produced fiscal 2002 sales of $2.2 billion and EBIT of $17 million. The Denver-based company features a broad line business distributing food to restaurants and universities, a second piece distributing to systems-oriented restaurants like Subway and a final component that distributes things like candy bars and potato chips to vending machine companies.
The deal is just the latest food-related buyout to hit the market in recent months. Other recent deals include Hicks, Muse, Tate & Furst’s $1.4 billion purchase of Conagra assets; Vestar Capital Partners’ $800 million-plus Agrilink buy from Pro-Fac; and Clayton, Dubilier & Rice’s deal with the U.K.’s Brake Bros. It is also not the first time that a major food manufacturer has sold off its distribution business. In 2000, Sara Lee Corp. sold off its PYA/Monarch division to U.S. Foodservice for $1.57 billion, while Kraft sold its Alliant Foodservice division to Clayton, Dubilier & Rice Inc.
“Food distribution companies have terrific stability of EBITDA, good recession resistance and are low capital intensive,” Dawson said. “After all, people need to eat.”
A First for Wellspring
Not only is the Multifoods deal the first time Wellspring has played in the food market, it is also the firm’s first investment out of its third fund. The new vehicle was launched last year with a $500 million target, but Buyouts has learned that the fund may close closer to the $750 million mark. A first close on between $400 million to $500 million is expected by the end of the month, with all commitments being counted by year-end.
William Dawson declined to comment on the new fund, except to say that it would maintain Wellspring’s traditional strategy of investing between $25 million to $75 million in companies that have growth potential.
Wellspring raised its $100 million first fund in 1995, and followed it up with a $268.5 million effort in 1998. Limited partners on Fund II included the State of Oregon, the State of Connecticut, the State of Rhode Island and the Ontario Teachers’ Pension Plan.