TRLPC: Food and drink M&A binge dishes up new loans

NEW YORK Thu May 15, 2014 2:07pm EDT

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NEW YORK (Reuters) - Food and beverage company tie-ups are heating up, feeding the market for loans backing these mergers in quantities that test 2008 peaks.

A planned $4.8 billion senior secured term loan B helping fund Hillshire Brands Co's HSH.N pending takeover of Pinnacle Foods Inc (PF.N) lifts issuance of loans completed or in process to at least $10 billion in this sector so far this year, according to Thomson Reuters LPC data.

Loans financing food, drink and tobacco corporate marriages spiked to around $27 billion in 2008, 10 times the volume in the prior year, before dropping to about $10 billion in 2009. The pace escalated last year to $23 billion.

Lender and investor appetite is hearty.

"We are always willing to finance good companies with solid cash flows that have the ability to repay their debt over time at reasonable leverage levels and fair economics," said Michael Turgel, portfolio manager on Eaton Vance's bank loan team.

"Branded food companies have traditionally exhibited these characteristics and have the ability to pass along costs to their end customers, helping to keep their cash flows available for debt service healthy even if their input costs are trending higher."

What's for dinner?

With the Hillshire/Pinnacle deal announced on May 12, the total value of food and beverage mergers and acquisitions reached nearly $60 billion this year, up 19 percent from the same time last year and the strongest year-to-date period since 2008, according to Thomson Reuters data.

This latest merger unites Hillshire's Jimmy Dean sausages and Hillshire lunch meats with Pinnacle's Birds Eye frozen vegetables and Vlasic pickles, among other well-known brands.

Cereal maker Post Holdings (POST.N) also has a seat at the M&A table, in the market with a $635 million senior secured term loan that will fund part of its $2.45 billion purchase of egg and dairy producer Michael Foods.

The trend is clear in non-investment grade as well as high-grade companies, Turgel said, noting the Mondelez merger with DE Master Blenders and pressure from activist investor Nelson Peltz to split PepsiCo's beverage business from its robust snacks division.

The feeding frenzy comes on the heels of consolidation in the grocery and food distribution space, the main customers of the now-merging food and beverage producers.

Cerberus Capital Management-owned AB Acquisition LLC, operator of Albertsons and other chains, this year said it is buying supermarket operator Safeway Inc. In December 2013, Sysco Corp, the largest food distributor, said it was acquiring No. 2 distributor US Foods.

The size that comes along with mergers may better feed products to these large distributors, as well as retailers such as Walmart and wholesale clubs including BJ's and Costco.

"As Walmart has become the dominant player in grocery, as the club channel has proliferated and become dominant as well, I think it makes sense and behooves these producing companies to have heft and bulk in the space," Turgel said.

(Editing By Michelle Sierra and Jon Methven)

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