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Due Diligence and Leveraged Buyout of Overhill Firms

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Due Diligence and Leveraged Buyout of Overhill Firms Powered By Docstoc
					                                DUE DILIGENCE AND LBO OF OVERHILL FARMS
                            PRESENTATION PREAPRED FOR GLENCOE CAPITAL
                                                                    December 12, 2010




DEB SAHOO MBA, ROSS SCHOOL OF BUSINESS UNIVERSITY OF MICHIGAN, ANN ARBOR
    AGENDA

     I.     Investment Summary
     II.    Industry and Company Overview
     III.   Financial Performance and Valuation
     IV.    Transaction Overview
     V.     Exit Strategies




2
I. INVESTMENT SUMMARY
     COMPANY OVERVIEW
     Company overview                                                        Products and services

     • value-added manufacturer of high quality, prepared frozen food           Branded Frozen Meals   White label frozen       Other Food
       products for branded retail, private label, foodservice and airline                             food                     Products

       customers                                                                                                            • Soups
                                                                                                                            • Sauces
     • Products are sold in retail club stores such as Sam's Club, and in                                                   • Frozen Vegetables
       leading grocery chains nationwide                                                                                    • Ready to eat frozen
                                                                                                                              meals
     • Headquarters, entrée manufacturing and warehousing, product                                                          • Custom meals

       development, sales and quality control facilities are located at a
       single location in Vernon, California.
    Source: Company Website


     Summary financials                                                      Customer Types

                                                                             • Grocery Chains

                                                                             • Restaurants

                                                                             • Airlines

                                                                             • Diet Brands

                                                                             • Discount Retailers



    Source: Company 10-k and Factset                                         Source: Company 10-k



4
    INVESTMENT HIGHLIGHTS
    OFI is an attractive take-out target with steady cash flows, minimal debt and is not benefiting
    from being a public company

     Overhill Farms,      • $194.5M in revenue in 2010, $209.8M estimated revenue in 2009
     Inc                  • $17.6M in EBITDA in 2010, $21M EBITDA in 2009
                          • Steady and healthy gross profit margin
     (Amex: OFI)


                          • Acquire company not currently benefiting from public ownership
     Role of              • Use of operating leverage will enhance returns to equity holders
     investment                   Base Case: 21% IRR
                          • Allow management to monetize a portion of its equity investment


                          • Management retains 12% pro forma ownership to participate in upside
     Investment           • Target an exit within five years by either sale of company, public offering
     structure              or other capital realization



                          • Conservative leverage to ensure financing and deal consummation
     Financing                    Proposing a senior bank loan of 2.2x 2010 EBITDA, credit revolver
     requirements                 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

5
    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
                            Healthy cash flows from operations over the last three years
    Stable cash flows      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)

                           Management team is highly qualified, experienced, and has helped the
    Strong management      Company grow.
                           Proposed structure would retain significant equity position, allowing them to
                           realize improved operational performance of company without punitive equity
                           market reaction

                            $13.2M of LT debt as of 9/26/2010
    Strong debt position     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           Company invested in and operating efficient production facilities
    customer base and      Offering expanding range of products to customer base
    products               Recently signed large white label product deal with large national retailer
                           Continuing to grow organically and exploring growth via acquisitions

6
    TARGETED RETURN OVERVIEW
    Conservative base case provides 21% IRR
        •Further upside from increased capacity utilization


    Base case
                                      Projected IRR of 21%
    (50% Capacity)



    80% Capacity                      Projected IRR of 29%
    Utilization




7
    INVESTMENT RISKS

                                     Risks                                 Mitigating Factors
                                                                • Commodity price volatility will affect
                      • Commodity price volatility (food
                                                                  competitors as well
     Market risk        and packaging)                          • Explore hedging in options market
                      • Consolidation among customers           • Provide range of products including items for
                      • Airline bankruptcy and cost               price-sensitive customers
                        cutting                                 • Diversified customers

                      • Operations are subject to stringent       •Currently operating in a highly
                        standards, including regulations mandated regulated environment
     Operating risk     by the federal Food, Drug and Cosmetic
                        Act, the FDA, OHSA, the EPA and the USDA
                      • Product liability

                      •Ability to finance debt, particularly      •Total debt less than 1x EBITDA
     Financing risk   $7.7 million in long-term adjustable
                      interest rate debt


                      • Potential acquisition reluctance as       • Industry trending toward
                        competitors can easily expand               consolidation
     Exit risk
                        product portfolio organically
                        without acquisitions



8
II. INDUSTRY AND COMPANY OVERVIEW
     CUSTOMERS AND SEGEMENTS

     Breakdown of Key Customers by Contribution to Revenue over the last 3 Financial
     Years




10
     DYNAMIC END MARKETS
     Overhill Farms end products is used by a diverse customer base across a number of
     Industries Food Processing Industry forecasted to grow at 4% CAGR
            –
                         2010- 2015
                                                              Factors for Growth

                                         Economic recovery in the US will increase consumer spending
         Retail            4.0% CAGR
                                       power
                                          Anticipated economic recovery next year will fuel further growth
       Restaurants         3.0% CAGR
                                          Growth will be buoyed by increased demand in eating out
                                          US Economic recover will increase demand for airline activity
        Airlines           2.0% CAGR
                                          Anticipated consolidation of airlines will keep growth minimal




11
     INDUSTRY OVERVIEW

                         • Frozen foods wholesale industry products include baked foods, seafood, poultry, meats ,
     Industry              soups, fruits and vegetables.
     overview            • 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


                          •   High investment requirements in warehouses and distribution system
     Barriers to entry    •   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
     Concentration       •    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
     Market size           revenue
                         • Mature industry dealing with essential items stable moderate growth rate
                           (projected 1.5% YOY)
                         • Well positioned to benefit from improvement in the economy

12
     CUSTOMERS AND SEGMENTS
     OFI serves a variety of private label retail and institutional customers

     Retail Chains




     Chain Restaurants




     Institutional Accounts




             Educational Facilities                                      Airlines   Health Care
                                                                                    Providers
13
     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


14
     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




15
       STOCK OWNERSHIP


     Company Name:       OVERHILL FARMS INC COM (OFI)
     Industry:           Food: Specialty/Candy
     Sector:             Consumer Non-Durables
     Market Cap:         Micro
     Total Shares out:   15,823,000




                    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




16
     MANAGEMENT COMPENSATION




17
     MANAGEMENT AND COMPANY ASSESSMENT
     OFI has a strong management team, good financials and a strategic industry position
     • Management has unique insights into challenges, opportunities and operation of the industry
     • Have expertise in dealing with large financial transactions, keeping return in sight

     Management                                                        Overhill Farms, Inc.
     Strengths                                                         Strengths
     • Executive management has significant experience with a          • Focused on large customers such as American Airline,
       solid understanding of the frozen food market                     Safeway, Panda Restaurant, Pinnacle Foods across multiple
                                                                         industries
     • Board of Directors is strong and deep – includes a former
       executive of H. J. Heinz Company, former consultant from        • Competitive as a result of the company’s ability to produce
       PwC , former executive of General Motors, several expert          mid-sized to large custom product runs within a short time
       lawyers                                                           frame on a cost-effective basis
     • Focused on exploring strategic opportunities and operational    • Has entered into intellectual property right agreement with
       efficiency                                                        Eating Right and Boston Market to produce and sell frozen
                                                                         entrées
     • CEO has a strategic vision for growth, business strategy and
       strategic planning skills and marketing acumen                  • Irrespective of a small backlog of orders, it has not affected
                                                                         the total revenues of the company
     Weaknesses                                                        Weaknesses
     • Most of top management are operational focused. This could      • Revenue concentration. A significant portion of total
       be a problem while taking new strategic initiatives               revenues during the last three fiscal years was derived from
     • More executives except key decision makers at the top have        top three customers
       expertise in financial services, but not in food sector which   • Competition comes from numerous regional and national
       may be disadvantageous while evaluating strategic moves           firms that are divisions of larger, highly integrated companies




18
III. FINANCIAL PERFORMANCE AND VALUATION
     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




20
     CURRENT FINANCIAL PROFILE
     Solid balance sheet with minimal debt
          Current ratio of 3.1
          Market capitalization of $87M
          Total Assets of $65.8M




21
     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
                                                                                                                         Dec 2010 OFI
            May 2006, OFI                                                                       Nov 2010, OFI
                                                                                                                         announces
            successfully completes                                  Sept, 2010, OFI signs       launches private label   revenues of $194M
            $47.5M restructuring                                    $30M credit facility with   frozen food line, as
                                                                                                                         and Net Income of
                                                                    BofA                        well as an alliance      $7.6M
                                                                                                with Boston Market




22
     PUBLIC COMPARABLES

                                                                                                      Valuation Comparison
                      All values in millions of U.S. Dollar, except per share 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

     ¹ Data is LTM.
     ² Market value calculated using all classes of shares for the company.                                                   MAX                1.87x   88.27x   29.59x   4.06x                    0.42x
     Source: FactSet Fundamentals, FactSet Estimates, FactSet Daily Prices, Hoover's                                         75th %              1.79x   69.42x   9.76x    2.40x                    0.27x
                                                                                                                             Mean                1.26x   43.36x   13.33x   1.89x                    0.20x
     LTM as of 10- Dec- 2010                                                                                                 Median              1.58x   36.82x   9.45x    1.90x                    0.22x
                                                                                                                             25th %              0.78x   11.81x   9.00x    1.10x                    0.12x




23
     PRECEDENT M&A COMPARABLES
                                                                               Precendent Transaction Analysis
     Announcement                                                                                                                          Enterprise Value Enterprise Enterprise Value /
                     Acquirer Company Name          Target Company Name             Target Company Description                   EV
         Date                                                                                                                                  / EBITDA      Value / EBIT  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 producer and processor                        $562.57            22.68x       22.68x            1.04x
       12/03/09     Goldstream Capital Ltd.     Auric Pacific Group Ltd.        Food & Bev marketing, distributing                 -$20.85             1.76x        2.17x            0.21x
       06/05/07     Remgro Ltd.                 Rainbow Chicken Ltd.            Producer and disributor of chicken                 $551.11            24.26x       24.26x            0.76x
       11/29/06     Nestle Purina PetCare Co.   Green's Foods Ltd.              Producer and disributor of speciality              $105.38            12.21x       75.38x            0.76x
                                                                                foods and candy
       09/18/06     Smithfield Foods, Inc.      Premium Standard Farms, Inc.    Producer and distributor of pork                      $824.98        1.19x        0.8x              -0.07x
       09/06/06     Hormel Foods Corp.          Provena Foods, Inc.             Producer and distributor of prepared                   $15.15        3.18x       5.92x               0.46x
                                                                                meats

                                                                                                                        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




24
     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




25
     LEVERAGE BUYOUT ANALYSIS




26
     VALUATION SUMMARY
     Overhill Farms is substantially undervalued as a public company




27
IV. TRANSACTION OVERVIEW
     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




29
     VALUE CREATION ALTERNATIVES


                           • Continue to enter into long term supply contracts and manage quality
                             control.
     Base Case             • 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.

                           • OFI can act as a Manufacturer’s Sales and Branch Office (MSBO) for
     Synergistic MSBO        Specialty Food Group (SFG) especially in western US
     agreement with              • SFG Inc. is a leading marketer and producer of premium meat
     SFG Inc. (a Glencoe           products based in Virginia.
     portfolio company)          • 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
30                           economies may not be realized.
V. EXIT STRATEGIES
     EXIT STRATEGIES

                         • Would allow for greatest valuation of company at exit
     Sale to Strategic   • Strategic buyers can utilize Overhill to reach new customer accounts or
     Buyer                 acquire leading-edge facilities


                         • Re-lever of Overhill would provide returns to present sponsor and allow
     Sale to Financial     continued growth of NGA
     Buyer               • Adequate number of PE firms with matching investment criteria


                         • Increased size of Overhill and expanded geographical presence may
     Public offering       increase visibility in investor community
                         • Company may be more successful continuing as private company


                         • Re-lever Overhill with additional debt to provide return to equity holders
     Dividend            • Financing for transaction may be difficult to secure
     recapitalization




32
     POTENTIAL STRATEGIC BUYERS

     Company       Market Cap   Description                        Rationale
                                Leader in selling, marketing       Largest player in food service
                     $17.2B     and distributing food products     space; may look to defend
                                to restaurants, healthcare and     Sysco branded products from
                                educational facilities, and        erosion by private labels
                                lodging establishments
                                #1 french fry maker in the         To expand product portfolio.
                     Private    world. Also produces a variety     Able to take advantage of
                                of other frozen foods. Owns        existing robust supply chain /
                                Ore-Ida food service business      channel overlap
                                (not retail)

                                Produces and markets a range       May be overly dependent on
                     $3.37B
                                of fresh meat and packaged         retail sales of packaged meats.
                                meat products both                 Has room to expand
                                domestically and internationally   institutional sales business

                                Produces, distributes and          Expand institutional customer
                      $6.7B     markets chicken, beef, pork,       base and diversity of prepared
                                and prepared foods                 food product portfolio




33
     POTENTIAL FINANCIAL BUYERS

     Company      Fund Size   Target Criteria         Relevant Portfolio Companies

                  $500M                                Numerous food industry investment
                              Revenue: $50 - $500M     including recent acquisition of pork
                                                       processor


                  $300M
                              Revenue: $10 - $200M     Fund focused on health sector and
                                                       consumer food goods
                                                       Recently sold stake in Atkins for 5x return



                  $1,500M                              Focus on food industry
                              Revenue: $20 - $1000M    Multiple investments in
                              EBITDA: $10 - $100M      food franchises, food
                              Equity: $15 - $350       producers, and restaurant
                                                       chains

                  $650M       Equity: $15 - $75M       Buys manufacturers and marketers of
                              Revenue: $25 - $500M     branded food products
                                                       Also buys suppliers of ingredients and
                                                       raw materials to food manufacturers




34

				
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