Del Monte Pacific enters deal to sell 13% stake in Philippine unit

MAINBOARD-LISTED food and beverage company Del Monte Pacific said it has entered into an agreement for the proposed sale of a 13 per cent stake in its indirect wholly-owned subsidiary Del Monte Philippines, Inc (DMPI) for US$130 million.

The "Investor", as the group termed the buyer in its regulatory filing on the Singapore Exchange on Friday evening, is a Singapore-incorporated company, SEA Diner Holdings Pte Ltd.

The company is focused on investing in leading companies in the consumer sector in China and the Asean region. The buyer and its affiliates have invested over US$1 billion in Asean and Chinese consumer businesses to date, including consumer product companies and technology firms.

The food category has been a key focus for the investor and its affiliates, with a particular emphasis on food products that have a large addressable market in China.

"The Investor has over 30 staff in the region and intends to play an active role in supporting DMPI," Del Monte Pacific said.

Back in February 2018, the group announced its intention to float DMPI on the Philippine Stock Exchange (PSE) but has since held off plans due to adverse market conditions.

"The board has since decided to explore the possibility of partnering an investor to enhance value in DMPI through a private placement involving the sale of some of DMPI's shares, such as the proposed sale," Del Monte Pacific said in its filing. The proceeds from this transaction will be used to partially prepay/repay certain loan facilities, it added.

The group, known for its sauces, juices and tinned fruits, posted a net loss of US$75.6 million for the six months ended Oct 31, 2019, against earnings of US$11.4 million previously. Turnover declined by 5.9 per cent to US$934.6 million.

In its filing, the company said that the US$130 million consideration for the proposed sale of a stake in DMPI takes into account, among other factors, about a 15.7 times price earnings multiple ratio of DMPI for the financial year ended Apr 30, 2019 earnings. Also factored in is the expected positive value-add and contribution from the investor following the closing of the proposed sale.

The parties have agreed that following the completion of the proposed sale of 363.65 million ordinary shares of DMPI to the investor (DMPI Sale Shares), they will be converted into redeemable convertible preferred shares (RCPS) in DMPI.

However, the RCPS shall be automatically converted into ordinary shares of DMPI upon the occurrence of either an initial public offering (IPO) or a trade or private sale of DMPI Sale Shares.

DMPI shall use its best efforts to provide the investor with an opportunity for an exit by the fifth year from the completion of the proposed sale.

If the exit has not occurred by the third year following the date of the agreement, the investor may elect to require DMPI to cooperate and facilitate an exit either via an IPO or any private or trade sale.

However, if there is no liquidity event (IPO or trade sale) after five years from the closing of the proposed sale, the RCPS shall be redeemed at the redemption price, which is an amount paid on the RCPS plus an 8 per cent rate of return (compounded on a per annum basis) calculated from the closing of the proposed sale up to the date of redemption.

Del Monte Pacific noted the proposed sale will allow the group to deleverage and strengthen its balance sheet, as well as improve its profitability with lower interest expense. However, it added: "While the company estimates the interest expense savings arising from the proposed sale will be significant, the estimated per annum interest cost savings is less than the potential redemption cost if the RCPS are redeemed."

Nevertheless, the proposed sale is the better option as compared to the group continuing to make interest payments under its outstanding loan facilities, it added.

Among the reasons it cited for this view, Del Monte Pacific said that the investor can add substantial value to DMPI's business, including helping it to grow its fresh fruit sales in China, where it has close relationships with many leading online and offline food retailers. The investor can also help DMPI grow its frozen fruit sales in China as well as help DMPI with its digital and automation strategies.

As the proposed sale is a major transaction under the SGX-ST Listing Manual, it is conditional on shareholders' approval at a general meeting. However, Del Monte Pacific applied for a waiver of this requirement so that the proposed sale can be completed in the shortest possible time.

Among other things, it noted that there are competing investment options available to the investor, which has also indicated its reluctance to sign a conditional deal subject to shareholders' approval as this would potentially stretch the completion timing.

Del Monte Pacific's controlling shareholders, namely NutriAsia Pacific Limited and Bluebell Group Holdings Limited, have provided to the company irrevocable undertakings to vote in favour of the proposed sale.

On Dec 5, 2019, SGX-ST granted the company conditional waiver approval. Among other conditions, this is subject to submission of a written undertaking from the company that it will seek shareholders' ratification of the proposed sale at an extraordinary general meeting to be held within three months from the date of the proposed sale.

Assuming the completion of the proposed sale, the group will recognise a net gain on disposal of about S$123 million. Based on the latest announced consolidated financial statements of the group for the six months ended Oct 31, 2019, net profit attributable to the DMPI Sale Shares amounted to about S$7.4 million.