Pinnacle Foods Lives Up to Its Name

 | May 12, 2014 | 6:05 PM EDT  | Comments
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ul

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hsh

We've seen a lot of junk come public this year. Most of those initial public offerings can only be described as the flotsam and jetsam of biotech and the dregs of tech -- lots of me-too companies with no business coming public yet. They are simply a function of the process where Wall Street sates the desires of the public with more and more deals of lower and lower quality in the segments that the market is most rabid for.

That's a far cry from what we saw last year, where initial public offerings were priced reasonably and managements and bankers alike were determined to bring merchandise at prices where everyone wins.

The best example? Pinnacle Foods (PF), the company that makes Birds Eye, Duncan Hines, Vlasic pickles, Mrs. Paul's and so many other household brands. Here's a company that came public at $20 and rallied 11% on the first day. That's the best possible outcome on the first day where everyone wins: The company, which had a lot of debt, managed to help fix its balance sheet with the new capital and the buyers get a nice little pop that makes the stock still reasonably priced.

Immediately CEO Bob Gamgort -- a veteran of Mars Inc., one of the best food companies in the world -- set out to bring out value for shareholders, offering an outsized dividend and promising more dividends down the road. While he made that promise, he also asserted that he would both cut costs and make acquisitions to further bulk up the aisles where the company sells wares. He also assured that he could make the company more natural and organic and keyed on Birds Eye, the vegetable company, to be his vehicle for healthier goods.

Gamgort came on "Mad Money" not long after and emphasized that the cash flow of these old brands was so strong that he could lay out a multi-year growth plan to create value, which was the antidote to the techs that were then coming public to huge acclaim.

Meanwhile the dividend, which gave the company about a 3% yield, began to benefit from the "bond equivalent" trade as interest rates plummeted. Then in August of last year, Unilever (UL) sold Wish-Bone, the salad dressing company, to Pinnacle for $580 million, in an immediately accretive deal. The company could easily afford it because of its huge cash flow.

Gamgort explained the deal to "Mad Money" viewers as the classic example of a brand that he could both raise the profile of and cut costs. He said there were many other opportunities out there and he would pursue them using inexpensive debt with a quick pay down.

Now Gamgort will never get a chance to do that with Pinnacle. Instead, he opted for a phenomenal bid from Hillshire Brands (HSH), one that gives shareholders both cash and some upside in the deal.

In short, Pinnacle Foods is the kind of tale that gives this class of assets a good name and Gamgort gives managers a paradigm for all to follow. Congratulations, Bob, and to all the shareholders who have benefitted from this terrific 15-month run.

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