Ortega Acquisition Diversifies B&G

The new $200 million credit for B&G Foods backing the company's $116 million acquisition of the Ortega food brands businesses from Nestlé Prepared Foods Co. is expected to add scale and diversity to the company's business. Ortega, a shelf-stable Mexican food brand, is expected to bring in 20% of B&G sales. But since Ortega has operated as a part of Nestlé's business, it may have benefited from the large-scale company's advantageous input and distribution relationships. While B&G has tried to adjust the numbers to reflect some of these concerns, the results remain to be seen, noted Helen Calvelli, a v.p. and senior credit officer for Moody's Investors Service. Going forward, B&G also plans to change the brand's marketing strategy, she added.

Ortega brings high brand awareness and relatively stable margins that have been higher than B&G's existing businesses. Free cash flow relative to debt is also expected to improve from roughly 5% of total debt due to the addition of Ortega. Moody's anticipates that free cash flow will be used to pay down debt as the company does have a track record of reducing debt post-acquisition. Interest coverage will also improve to 2.2 times from 1.7 times on a pro forma basis due in part to the low cost bank debt. Lehman Brothers is leading the syndication for the new loan, which is priced between LIBOR plus 31/4-31/2% (see story, page 3).

Moody's has assigned the new $50 million, five-year revolver and $150 million, six-year term loan a B1 rating. The ratings are restrained by the company's high leverage for the last 12 months, which would have been 5.2 times if Ortega's addition were taken into account. Moody's also notes the company's weak balance sheet represented by 70% intangible assets and a negative tangible net worth. In a distressed scenario, principal recovery would rely heavily on the realization of the intangible values. Moreover, due to the maturity of B&G's portfolio of 16 brands, sales growth is expected to be generated through further acquisitions, a strategy that has become a part of the company's business plan, noted Calvelli. Robert Cantwell, executive v.p. of finance and cfo of B&G, said the company received the ratings it expected.