Food giant ConAgra Inc. yesterday agreed to acquire packaged-foods powerhouse Beatrice Co. in a $1.3 billion transaction that will provide a long-awaited windfall to the New York investment firm Kohlberg Kravis Roberts & Co., which led a leveraged buyout of Beatrice four years ago.
The investors assembled by KKR will reap a $1.8 billion profit on their $420 million investment in Beatrice, giving them an annual return of better than 50 percent on their money. Some of that gain came from earlier Beatrice asset sales.
The $1.8 billion profit is a better payoff than many analysts had expected, since KKR reportedly had struggled over the past two years to find a buyer for Beatrice, even on a piecemeal basis.
The deal brings together some of the nation's best-known brand names: Omaha-based ConAgra is a major meat packer that markets processed meat and frozen food products under the Armour, Morton, Banquet and Chun King names, among others, while Chicago-based Beatrice makes Hunt's ketchup, Wesson oil, Peter Pan peanut butter, Swift Premium, Eckrich and Butterball meats and Orville Redenbacher's popcorn.
The proposed acquisition of Beatrice ends a long dry spell for big-buck corporate transactions in the United States. Takeovers have all but dried up in recent months as problems in the market for high-risk, high-yield junk bonds have made it difficult to raise money. By using cash and stock to make a strategic acquisition, ConAgra's takeover of Beatrice marks a return to more traditional corporate dealmaking.
Once a public company, Beatrice was taken private in 1986 in a $6.2 billion leveraged buyout arranged by KKR -- at the time, the largest LBO in history. In a leveraged buyout, a company is acquired using mostly borrowed money. The interest is paid through a combination of cash from operations and asset sales. After the LBO, Beatrice reduced debts incurred in the deal by quickly selling several large divisions, including its Tropicana juice, Avis rent-a-car and Playtex clothing lines. Those transactions gave investors in the buyout their first profits on the deal.
But more recent attempts to sell other Beatrice operations were unsuccessful, giving the investors no additional return on their money, and an effort to restructure Beatrice's debt to produce some return for investors reportedly fell through earlier this year. That led to Wall Street speculation that KKR -- which has been stuck with several ailing LBOs as that market has faded in the past couple of years -- had a white elephant on its hands.
ConAgra, however, had other ideas. Though the company was preoccupied for many months last year with its unsuccessful attempt to acquire chicken-producer Holly Farms Corp., it has been looking to diversify in the food business away from an almost total reliance on frozen and refrigerated foods. According to ConAgra Chairman Charles M. Harper, the negotiations with KKR about Beatrice began in January.
"We've had an objective for a long time, a number of years, to find a way for a solid entry into the dry part of the grocery store," Harper said in an interview yesterday. "We've been very weak there. We're very strong in the frozen part of the grocery store, but not in the dry part."
Industry analysts concurred that Beatrice would be an excellent addition to ConAgra, increasing the company's annual revenue to almost $20 billion from $15 billion.
"The fit looks awfully good," said L. Craig Carver, a food-industry analyst at Dain Bosworth Inc., a Minneapolis brokerage. "They're acquiring several strong No. 1 brand names and several strong No. 2 brand names."
"You know what this suggests to me? More shelf space for ConAgra in America's grocery stores and higher profitability," said Janet Mangano, who follows ConAgra for Josephthal & Co. Inc., a New York securities firm. "There's a lot of value added in having the brand names that Beatrice can offer ConAgra."
Although there is a slight overlap between some of the companies' lines, neither Harper nor the analysts said they expected any antitrust problems. The packaged meat business, in which both companies are major players, is hotly competitive, and ConAgra's Chun King line of frozen Chinese food complements Beatrice's La Choy packaged Chinese food business. "I find it impossible to believe that anybody can get a monopoly in Chinese food," Harper said with a laugh.
Under the terms of the agreement announced yesterday, ConAgra will pay $11.50 a share for Beatrice's 123.4 million closely held shares. The $1.3 billion will be in a package consisting of $626 million in cash, $355 million in ConAgra common stock and $355 million in preferred stock.
The deal was announced after the trading day ended on Wall Street.