DUE DILIGENCE AND LBO OF OVERHILL FARMS
December 12, 2010
DEB SAHOO MBA, ROSS SCHOOL OF BUSINESS UNIVERSITY OF MICHIGAN, A...
2
AGENDA
I. Investment Summary
II. Industry and Company Overview
III. Financial Performance and Valuation
IV. Transaction ...
I. INVESTMENT SUMMARY
4
COMPANY OVERVIEW
Company overview
• value-added manufacturer of high quality, prepared frozen food
products for branded ...
5
INVESTMENT HIGHLIGHTS
OFI is an attractive take-out target with steady cash flows, minimal debt and is not benefiting
fr...
6
INVESTMENT RATIONALE
OFI provides cycle-resistant free cash flows with no current operating leverage and its
management ...
7
TARGETED RETURN OVERVIEW
Conservative base case provides 21% IRR
•Further upside from increased capacity utilization
Bas...
8
INVESTMENT RISKS
Risks Mitigating Factors
Market risk
• Commodity price volatility (food
and packaging)
• Consolidation ...
II. INDUSTRY AND COMPANY OVERVIEW
10
CUSTOMERS AND SEGEMENTS
Breakdown of Key Customers by Contribution to Revenue over the last 3 Financial
Years
11
DYNAMIC END MARKETS
Overhill Farms end products is used by a diverse customer base across a number of
Industries
Retail...
12
INDUSTRY OVERVIEW
Industry
overview
Barriers to entry
Concentration
Market size
• High investment requirements in wareh...
13
CUSTOMERS AND SEGMENTS
Retail Chains
Chain Restaurants
OFI serves a variety of private label retail and institutional c...
14
LONG TERM CONTRACTS WITH MAJOR RETAILERS
OFI has multi-year supply contracts with major national retailers
Supply contr...
15
MANAGEMENT PROFILE
James Rudis
• Chairman of the Board, President, Chief Executive Officer and Director
• 61 years old
...
16
STOCK OWNERSHIP
Holder Name Position Mkt Val % O/S Holdings Style Cap Group Style Type
Hotchkis & Wiley Capital Managem...
17
MANAGEMENT COMPENSATION
18
MANAGEMENT AND COMPANY ASSESSMENT
Management
Strengths
• Executive management has significant experience with a
solid u...
III. FINANCIAL PERFORMANCE AND VALUATION
20
SUPERIOR FINANCIAL PERFORMANCE
Strong margins, substantial cash flow and low debt levels
Significant free cash flow wit...
21
CURRENT FINANCIAL PROFILE
Solid balance sheet with minimal debt
Current ratio of 3.1
Market capitalization of $87M
Tota...
22
STOCK PERFORMANCE
OFI stock has generally been steady, with few dramatic reactions from investors
– Closing price of $5...
23
PUBLIC COMPARABLES
Allvaluesin millionsof U.S. Dollar, except pershare items.
Total Debt /
Fiscal Enterprise Price / EP...
24
PRECEDENT M&A COMPARABLES
Announcement
Date
AcquirerCompanyName TargetCompanyName TargetCompanyDescription EV
Enterpris...
25
FINANCIAL PROJECTIONS
Sales growth approximates average growth of metal plating and end market industries
Base case ass...
26
LEVERAGE BUYOUT ANALYSIS
27
VALUATION SUMMARY
Overhill Farms is substantially undervalued as a public company
IV. TRANSACTION OVERVIEW
29
TRANSACTION SUMMARY
$6.60 / share offer price represents 20% premium over 12/10/2010 closing price
Total purchase price...
30
VALUE CREATION ALTERNATIVES
Synergistic MSBO
agreement with
SFG Inc. (a Glencoe
portfolio company)
• OFI can act as a M...
V. EXIT STRATEGIES
32
EXIT STRATEGIES
Sale to Strategic
Buyer
• Would allow for greatest valuation of company at exit
• Strategic buyers can ...
33
POTENTIAL STRATEGIC BUYERS
Company Market Cap
$17.2B
Private
$3.37B
$6.7B
Description
Leader in selling, marketing
and ...
34
POTENTIAL FINANCIAL BUYERS
Company Fund Size
$500M
$300M
$1,500M
$650M
Target Criteria
Revenue: $50 - $500M
Revenue: $1...
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05. due diligence and leveraged buyout of overhill firms (deb sahoo)

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05. due diligence and leveraged buyout of overhill firms (deb sahoo)

  1. 1. DUE DILIGENCE AND LBO OF OVERHILL FARMS December 12, 2010 DEB SAHOO MBA, ROSS SCHOOL OF BUSINESS UNIVERSITY OF MICHIGAN, ANN ARBOR PRESENTATION PREAPRED FOR GLENCOE CAPITAL
  2. 2. 2 AGENDA I. Investment Summary II. Industry and Company Overview III. Financial Performance and Valuation IV. Transaction Overview V. Exit Strategies
  3. 3. I. INVESTMENT SUMMARY
  4. 4. 4 COMPANY OVERVIEW Company overview • value-added manufacturer of high quality, prepared frozen food products for branded retail, private label, foodservice and airline customers • Products are sold in retail club stores such as Sam's Club, and in leading grocery chains nationwide • Headquarters, entrée manufacturing and warehousing, product development, sales and quality control facilities are located at a single location in Vernon, California. Products and services Summary financials Customer Types • Grocery Chains • Restaurants • Airlines • Diet Brands • Discount Retailers Source: Company 10-k and Factset Source: Company Website Source: Company 10-k Branded Frozen Meals White label frozen food Other Food Products • Soups • Sauces • Frozen Vegetables • Ready to eat frozen meals • Custom meals
  5. 5. 5 INVESTMENT HIGHLIGHTS OFI is an attractive take-out target with steady cash flows, minimal debt and is not benefiting from being a public company Role of investment Investment structure Overhill Farms, Inc (Amex: OFI) • $194.5M in revenue in 2010, $209.8M estimated revenue in 2009 • $17.6M in EBITDA in 2010, $21M EBITDA in 2009 • Steady and healthy gross profit margin • Acquire company not currently benefiting from public ownership • Use of operating leverage will enhance returns to equity holders Base Case: 21% IRR • Allow management to monetize a portion of its equity investment • Management retains 12% pro forma ownership to participate in upside • Target an exit within five years by either sale of company, public offering or other capital realization Financing requirements • Conservative leverage to ensure financing and deal consummation Proposing a senior bank loan of 2.2x 2010 EBITDA, credit revolver of 1.7x 2010 EBITDA, and Senior Sub Debt of 0.8x 2010 EBITDA • Sponsor equity financing, management equity rollover, and balance sheet cash to cover remainder of purchase price
  6. 6. 6 INVESTMENT RATIONALE OFI provides cycle-resistant free cash flows with no current operating leverage and its management team is likely looking to monetize part of its equity position Stable cash flows Healthy cash flows from operations over the last three years Predictable cash flows enable self funding of capital expenditures and increases in working capital Company has maintained margins and grown free cash flows through downturn in economic cycle and material volatility of material key inputs (see slide 29) Strong management Management team is highly qualified, experienced, and has helped the Company grow. Proposed structure would retain significant equity position, allowing them to realize improved operational performance of company without punitive equity market reaction Strong debt position $13.2M of LT debt as of 9/26/2010 Strong cash flows enabled pay-down of proposed $20.28M of bank debt over 3 years Recent capital expenditures put company in a position for growth without requiring near future large capital investment Diversifying customer base and products Company invested in and operating efficient production facilities Offering expanding range of products to customer base Recently signed large white label product deal with large national retailer Continuing to grow organically and exploring growth via acquisitions
  7. 7. 7 TARGETED RETURN OVERVIEW Conservative base case provides 21% IRR •Further upside from increased capacity utilization Base case (50% Capacity) Projected IRR of 21% 80% Capacity Utilization Projected IRR of 29%
  8. 8. 8 INVESTMENT RISKS Risks Mitigating Factors Market risk • Commodity price volatility (food and packaging) • Consolidation among customers • Airline bankruptcy and cost cutting • Commodity price volatility will affect competitors as well • Explore hedging in options market • Provide range of products including items for price-sensitive customers • Diversified customers Operating risk • Operations are subject to stringent standards, including regulations mandated by the federal Food, Drug and Cosmetic Act, the FDA, OHSA, the EPA and the USDA • Product liability Financing risk •Ability to finance debt, particularly $7.7 million in long-term adjustable interest rate debt Exit risk • Potential acquisition reluctance as competitors can easily expand product portfolio organically without acquisitions • Industry trending toward consolidation •Total debt less than 1x EBITDA •Currently operating in a highly regulated environment
  9. 9. II. INDUSTRY AND COMPANY OVERVIEW
  10. 10. 10 CUSTOMERS AND SEGEMENTS Breakdown of Key Customers by Contribution to Revenue over the last 3 Financial Years
  11. 11. 11 DYNAMIC END MARKETS Overhill Farms end products is used by a diverse customer base across a number of Industries Retail 4.0% CAGR Economic recovery in the US will increase consumer spending power Restaurants 3.0% CAGR Anticipated economic recovery next year will fuel further growth Growth will be buoyed by increased demand in eating out Airlines 2.0% CAGR US Economic recover will increase demand for airline activity Anticipated consolidation of airlines will keep growth minimal 2010- 2015 Factors for Growth – Food Processing Industry forecasted to grow at 4% CAGR
  12. 12. 12 INDUSTRY OVERVIEW Industry overview Barriers to entry Concentration Market size • High investment requirements in warehouses and distribution system • Effective quality control is a must • Existing multi-year supply contracts with retailers • Nature of the product and transportation costs make the industry domestic in nature • Industry concentration is low, hence reasonable pricing power • Top four firms account for 24% of market share • Industry consolidation is expected • Geographically concentrated in west and Southeast regions • Industry revenue in 2009 expected to be $87.8 billion • Frozen poultry, ready to eat dinners, vegetables and meats make 58.4% of revenue • Mature industry dealing with essential items stable moderate growth rate (projected 1.5% YOY) • Well positioned to benefit from improvement in the economy • Frozen foods wholesale industry products include baked foods, seafood, poultry, meats , soups, fruits and vegetables. • Demand is projected grow in line with the overall economic growth • Threat of globalization in the industry is low • Competition driven by relative costs/prices • Highly regulated industry due to nature of the products
  13. 13. 13 CUSTOMERS AND SEGMENTS Retail Chains Chain Restaurants OFI serves a variety of private label retail and institutional customers Educational Facilities Airlines Institutional Accounts Health Care Providers
  14. 14. 14 LONG TERM CONTRACTS WITH MAJOR RETAILERS OFI has multi-year supply contracts with major national retailers Supply contracts and agreements are major drivers in this industry Recent exclusive supply contracts: – Contract to produce a line of 16 private label meals with a national retailer (name undisclosed for competitive reasons) likely to produce revenues of 7 million USD, possibility of further expansion later. – Exclusive license contract with Boston Market Corp. to manufacture, distribute and market Boston Market brand of retail frozen foods. Existing supply contracts : Long term contracts assure stable revenues with strong potential of revenue growth
  15. 15. 15 MANAGEMENT PROFILE James Rudis • Chairman of the Board, President, Chief Executive Officer and Director • 61 years old • Was elected to board of directors in April 1995 and has served as President and Chief Executive Officer since June 1997 • Prior to his employment with OFI, Mr. Rudis was president of Quorum Corporation, a private consulting firm involved in acquisitions and market development Tracy E. Quin • Interim Chief Financial Officer • 56 years old • Former controller at the H. J. Heinz Company • Became Interim CFO in September 2007 • Previous experience includes various senior-level finance and operating positions for the H. J. Heinz Company Robert A. Olivarez • Vice President-Finance and Secretary • 31 years old • Served as Secretary since May 2010 and served as Vice President-Finance since February 2010 • Prior to becoming Vice President-Finance, he was Manager-Finance from June 2007. • Experience includes assurance practice at PricewaterhouseCoopers, LLP in the Los Angeles, California office since 2001
  16. 16. 16 STOCK OWNERSHIP Holder Name Position Mkt Val % O/S Holdings Style Cap Group Style Type Hotchkis & Wiley Capital Management LLC 2,624,352 14,722,615 16.59 Yield Large Cap Mutual Fund Manager Lord Abbett & Co. LLC 2,507,575 14,067,496 15.85 Value Large Cap Mutual Fund Manager ESTES HAROLD L 1,111,565 6,235,880 7.03 Individual Royce & Associates LLC 714,888 4,010,522 4.52 Value Multi Cap Investment Adviser Northern Trust Co. of Connecticut 348,952 1,957,621 2.21 Growth Large Cap Bank Management Division Metropolitan West Capital Management LLC 348,952 1,831,998 2.21 GARP Large Cap Dimensional Fund Advisors, Inc. 269,611 1,512,518 1.70 Value Multi Cap Investment Adviser LSV Asset Management 263,094 1,475,957 1.66 Yield Large Cap Investment Adviser TT International 268,337 1,408,769 1.70 GARP Large Cap OppenheimerFunds, Inc. 234,522 1,315,668 1.48 Growth Large Cap Investment Adviser Company Name: OVERHILL FARMS INC COM (OFI) Industry: Food: Specialty/Candy Sector: Consumer Non-Durables Market Cap: Micro Total Shares out: 15,823,000
  17. 17. 17 MANAGEMENT COMPENSATION
  18. 18. 18 MANAGEMENT AND COMPANY ASSESSMENT Management Strengths • Executive management has significant experience with a solid understanding of the frozen food market • Board of Directors is strong and deep – includes a former executive of H. J. Heinz Company, former consultant from PwC , former executive of General Motors, several expert lawyers • Focused on exploring strategic opportunities and operational efficiency • CEO has a strategic vision for growth, business strategy and strategic planning skills and marketing acumen Weaknesses • Most of top management are operational focused. This could be a problem while taking new strategic initiatives • More executives except key decision makers at the top have expertise in financial services, but not in food sector which may be disadvantageouswhile evaluating strategic moves Overhill Farms, Inc. Strengths • Focused on large customers such as American Airline, Safeway, Panda Restaurant, Pinnacle Foods across multiple industries • Competitive as a result of the company’s ability to produce mid-sized to large custom product runs within a short time frame on a cost-effective basis • Has entered into intellectual property right agreement with Eating Right and Boston Market to produce and sell frozen entrées • Irrespective of a small backlog of orders, it has not affected the total revenues of the company Weaknesses • Revenue concentration. A significant portion of total revenues during the last three fiscal years was derived from top three customers • Competition comes from numerous regional and national firms that are divisions of larger, highly integrated companies • Management has unique insights into challenges, opportunities and operation of the industry • Have expertise in dealing with large financial transactions, keeping return in sight OFI has a strong management team, good financials and a strategic industry position
  19. 19. III. FINANCIAL PERFORMANCE AND VALUATION
  20. 20. 20 SUPERIOR FINANCIAL PERFORMANCE Strong margins, substantial cash flow and low debt levels Significant free cash flow with minimal capital expenditures required Demonstrated ability to maintain margins during rising food price environment
  21. 21. 21 CURRENT FINANCIAL PROFILE Solid balance sheet with minimal debt Current ratio of 3.1 Market capitalization of $87M Total Assets of $65.8M
  22. 22. 22 STOCK PERFORMANCE OFI stock has generally been steady, with few dramatic reactions from investors – Closing price of $5.61 at December 10, 2010 – Stock price has fluctuated between $3 and $6.40 since 2008 – Prices outside this range over the last five years appear to be due to systematic conditions Sept, 2010, OFI signs $30M credit facility with BofA Nov 2010, OFI launches private label frozen food line, as well as an alliance with Boston Market May 2006, OFI successfully completes $47.5M restructuring Dec 2010 OFI announces revenues of $194M and Net Income of $7.6M
  23. 23. 23 PUBLIC COMPARABLES Allvaluesin millionsof U.S. Dollar, except pershare items. Total Debt / Fiscal Enterprise Price / EPS FY1 Enterprise Value / Enterprise Company Name Period Value LTM FY1 NTM Date Sales EBIT EBITDA EBITDA Value Overhill Farms, Inc. (OFI-USA) 09/2010 ¹ 96.0 11.94 - - 09/2010 0.49x 6.9x 5.4x 0.74x 0.14x Peer Universe (5 comps) Compass Group Plc (CPG-GB) 09/2010 ¹ 18,326.2 16.04 14.78 14.48 09/2011 1.58x 11.8x 9.5x 1.10x 0.12x Armanino Foods of Distinction, Inc. (AMNF) 03/2005 ¹ 23.6 8.22 - - 12/2010 1.79x 69.4x 29.6x 0.00x 0.00x Autogrill SpA (AGL-IT) 09/2010 ¹ 6,248.9 57.64 21.86 18.11 12/2010 0.78x 36.8x 9.8x 4.06x 0.42x Campbell Soup Co. (CPB) 10/2010 ¹ 14,292.6 14.49 13.74 13.48 07/2011 1.87x 10.5x 8.8x 1.90x 0.22x Cuisine Solutions, Inc. (CUSI) 03/2009 ¹ 21.7 (120.25) - - 06/2011 0.27x 88.3x 9.0x 2.40x 0.27x ¹Data isLTM. ²Market value calculated using allclassesof sharesforthe company. 1.87x 88.27x 29.59x 4.06x 0.42x Source: FactSet Fundamentals, FactSet Estimates, FactSet DailyPrices, Hoover's 1.79x 69.42x 9.76x 2.40x 0.27x 1.26x 43.36x 13.33x 1.89x 0.20x LTMasof 10-Dec-2010 1.58x 36.82x 9.45x 1.90x 0.22x 0.78x 11.81x 9.00x 1.10x 0.12x25th% Valuation Comparison MAX 75th% Mean Median
  24. 24. 24 PRECEDENT M&A COMPARABLES Announcement Date AcquirerCompanyName TargetCompanyName TargetCompanyDescription EV Enterprise Value /EBITDA Enterprise Value /EBIT Enterprise Value / Revenue 12/02/10 PepsiCo, Inc. Wimm-Bill-Dann Foods OJSC Dairy Producer $5,779.00 7.03x 8.83x 0.85x 11/24/10 Danone SA Yocream International, Inc. Mfrs yoghurt, ice cream $99.75 18.77x 29.53x 2.44x 06/11/10 Talleys Group Ltd. Affco Holdings Ltd. Meat producerand processor $562.57 22.68x 22.68x 1.04x 12/03/09 Goldstream Capital Ltd. AuricPacificGroup Ltd. Food & Bev marketing, distributing -$20.85 1.76x 2.17x 0.21x 06/05/07 Remgro Ltd. Rainbow Chicken Ltd. Producerand disributor of chicken $551.11 24.26x 24.26x 0.76x 11/29/06 Nestle Purina PetCare Co. Green's Foods Ltd. Producerand disributor of speciality foods and candy $105.38 12.21x 75.38x 0.76x 09/18/06 Smithfield Foods, Inc. Premium Standard Farms, Inc. Producerand distributorof pork $824.98 1.19x 0.8x -0.07x 09/06/06 Hormel Foods Corp. Provena Foods, Inc. Producerand distributorof prepared meats $15.15 3.18x 5.92x 0.46x MAX 24.26x 75.38x 2.44x 75th % 19.75x 25.58x 0.90x Mean 11.39x 21.20x 0.81x Median 9.62x 15.755x 0.76x 25th % 2.83x 4.98x 0.40x Min 1.19x 0.8x -0.07x PrecendentTransaction Analysis
  25. 25. 25 FINANCIAL PROJECTIONS Sales growth approximates average growth of metal plating and end market industries Base case assumptions are conservative, leaving substantial upside potential to estimated returns Margin Assumptions Gross Margin – 86% based on ‘09 and ‘10 performance SG&A – 4% of sales based on ‘07 – ’10 average (assume no margin expansion due to improved capacity utilization) Capital Expenditures – moderate spike in 2011 due to protein cooking plant expansion
  26. 26. 26 LEVERAGE BUYOUT ANALYSIS
  27. 27. 27 VALUATION SUMMARY Overhill Farms is substantially undervalued as a public company
  28. 28. IV. TRANSACTION OVERVIEW
  29. 29. 29 TRANSACTION SUMMARY $6.60 / share offer price represents 20% premium over 12/10/2010 closing price Total purchase price of $104M Financing Assumptions Senior Debt at 2.2x EBITDA (’10) Utilize existing revolver of $30M Senior Subordinated debt of 0.8X EBITDA (‘10) Management rolls-over 5% of equity Required equity contribution of $30.2M
  30. 30. 30 VALUE CREATION ALTERNATIVES Synergistic MSBO agreement with SFG Inc. (a Glencoe portfolio company) • OFI can act as a Manufacturer’s Sales and Branch Office (MSBO) for Specialty Food Group (SFG) especially in western US • SFG Inc. is a leading marketer and producer of premium meat products based in Virginia. • Expand operations to new regions and strengthen market share in existing areas of operations because of expanded product line. • Possible 5% increase in profits even by conservative estimates. • MSBOs realize greater economies of scale also help in mitigating the wholesale bypass risk • Leverage SFG’s existing relationships for access to niche markets in eastern US • Purchase costs are nearly 85% revenues (industry average ~82%) Pro: Improve efficiencies and mitigate operating risks. Realize higher economies of scale. Con: Without careful planning of the distribution systems the requisite scale economies may not be realized. Base Case • Continue to enter into long term supply contracts and manage quality control. • Recent agreements with national level retailers and chains aid in getting more contracts in future Pro: Growth in EBITDA due to increased revenues, broader customer base Con: Expansion of product line may be required which would require investment in facilities.
  31. 31. V. EXIT STRATEGIES
  32. 32. 32 EXIT STRATEGIES Sale to Strategic Buyer • Would allow for greatest valuation of company at exit • Strategic buyers can utilize Overhill to reach new customer accounts or acquire leading-edge facilities Sale to Financial Buyer • Re-lever of Overhill would provide returns to present sponsor and allow continued growth of NGA • Adequate number of PE firms with matching investment criteria Public offering • Increased size of Overhill and expanded geographical presence may increase visibility in investor community • Company may be more successful continuing as private company Dividend recapitalization • Re-lever Overhill with additional debt to provide return to equity holders • Financing for transaction may be difficult to secure
  33. 33. 33 POTENTIAL STRATEGIC BUYERS Company Market Cap $17.2B Private $3.37B $6.7B Description Leader in selling, marketing and distributing food products to restaurants, healthcare and educational facilities, and lodging establishments #1 french fry maker in the world. Also produces a variety of other frozen foods. Owns Ore-Ida food service business (not retail) Produces, distributes and markets chicken, beef, pork, and prepared foods Rationale Largest player in food service space; may look to defend Sysco branded products from erosion by private labels To expand product portfolio. Able to take advantage of existing robust supply chain / channel overlap Expand institutional customer base and diversity of prepared food product portfolio Produces and markets a range of fresh meat and packaged meat products both domestically and internationally May be overly dependent on retail sales of packaged meats. Has room to expand institutional sales business
  34. 34. 34 POTENTIAL FINANCIAL BUYERS Company Fund Size $500M $300M $1,500M $650M Target Criteria Revenue: $50 - $500M Revenue: $10 - $200M Revenue: $20 - $1000M EBITDA: $10 - $100M Equity: $15 - $350 Equity: $15 - $75M Revenue: $25 - $500M Relevant Portfolio Companies Numerous food industry investment including recent acquisition of pork processor Fund focused on health sector and consumer food goods Recently sold stake in Atkins for 5x return Focus on food industry Multiple investments in food franchises, food producers, and restaurant chains Buys manufacturers and marketers of branded food products Also buys suppliers of ingredients and raw materials to food manufacturers

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