Del Monte Pacific to delever after jumbo LBO

[SINGAPORE] Philippine canned juice maker Del Monte Pacific Limited is planning to meet investors at the beginning of next year ahead of a rare offshore preference share offering of US$360m, according to sources close to the transaction.

The Reg S deal, likely to be unrated, will be used to part take out a US$630 million bridge loan backing DMPL's US$1.675 billion buyout of US-based Del Monte Foods Inc (DMFI) in February this year.

The offering will provide investors an opportunity to access a US consumer business that contributes to 80 per cent of the resulting company's turnover. The deal, however, will also test investor appetite for a credit whose net gearing is at an eye-popping 9x, rare for an Asian company.

The Singapore and Manila dual-listed company looks to delever in 2015 via the preference share offering and a US$180 million rights issue. After the two transactions, which will raise net proceeds of US$515 million, and additional debt payment of US$230-US$280 million from cash flow, DMPL expects to lower its net gearing to 1.7x-1.8x by April 2015, according to a company filing on Monday.

It had initially planned to place the pref shares in the domestic market via BDO Capital. But a delay in regulatory approval made it turn to the international market and mandated DBS as the sole lead, according to a banker close to the transaction and a company filing. DBS has also underwritten the rights issue.

Asian barbarian DMFI, the key US asset that would generate cash flow to repay the mounting buyout debt, had a long history with private equity firms as it was an ideal target for leveraged buyouts given its stable cash flow from the consumer food business.

It was also part of RJR Nabisco, which was bought by KKR in a history-making US$25 billion buyout in 1988, documented in the book Barbarians At The Gate. KKR sold DMFI to a consortium in 1990. Seven years later, TPG acquired the assets, before KKR snatching it back again in 2011.

DMPL's acquisition of DMFI in 2014 was no accident. DMFI has been involved in the Philippines since it set up business in the country in 1926. After 70 years, DMFI divested the Philippine business in 1996. Three years later, the Philippine business, with the name of Del Monte Pacific Limited, was incorporated and listed on the Singapore stock exchange. In 2006, NutriAsia Pacific, majority-owned by the Campos family of the Philippines, bought a 85 per cent stake in DMPL, which in 2014 acquired the much larger DMFI via the leveraged buyout.

The Campos family, with net worth of US$825 million as of August 2014, ranked as the 20th richest in the Philippines according to Forbes. Through NutriAsia Pacific, the Campos family now owns 67 per cent of DMPL.

While investors may like the stable food business, the exceptionally high leverage will test the risk appetite among Asian investors. "It is credit positive that the company has been acquired by a strategic investor this time (as opposed to another PE), especially when the strategic investor is in the same line of business," said a credit analyst. "But the US business will need to pay down the debt at its level before it is able to upstream dividend to the Philippine parent," he said. "The deleveraging could take some time." The high debt level will likely be a sticky point. As of October 31, DMPL had net debt of US$2 billion and consolidated Ebitda for three months ended October 31 of US$59.4 million, before acquisition-related costs. Based on those numbers, its pro-forma net-debt-to-Ebitda ratio would easily exceed 8x, a level not commonly seen in LBOs in Asia where debt rarely exceeds 5x Ebitda of the resulting company.

The stable earnings and cash flow predictability are likely to offset the risks of high leverage and therefore soothe investors to certain extent, analysts said.

There are also many elements about the deal that would get investors excited. Being a consumer perp from the Philippines, investors are likely to assign rarity value to the deal. "Investors are starving for diversity right now given much of the high-yield paper is from China these days," the banker close to the deal said.

The company had guided its onshore pref share offering at 5.25-7 per cent before pulling the deal, with a 250bp step-up if the notes were not called at the end of year five.

It would be hard for DMPL to achieve that level in the offshore market, analysts noted. The US$300m 7.5 per cent perpetual bonds for Philippines' largest brewer San Miguel Corporation, for example, were indicated at around 7 per cent yield-to-call as of Wednesday.

REUTERS