Description

We recommend a short position on B&G Foods (“Company”).

Trifecta of problems:

- Debt Covenants and 830mm of floating rate debt will pressure its ability to continue paying dividends unless drastic Fed rate cuts materialize which is appearing less likely by the day. Company already announced a 60% dividend cut in Nov ‘22 but still pays out ~$55mm or ~$0.76 share annually. Another cut or dividend suspension is likely to come

- Debt maturities (beginning with senior notes due April 1, 2025) cannot be fully refinanced in the debt markets at the current leverage ratios and will require addt'l equity capital. or fire sales of assets or brands into a difficult M&A environment without the ability to offer seller financing. The company has an ATM outstanding and used it to raise ~180mm at an average share price of ~$27 or 6.5mm shares, nearly 10% of shares out. since 2021 but share prices at this point would make it incredibly dilutive.

- Volumes of BGS’ commoditized branded products are decreasing as the company passes along price increases driven by input cost inflation and recent earnings and volumes trends from its sector indicates the overall consumer is pulling back. The price elasticity which will eventually create margin pressures when further price increases are no longer attainable and the company sees negative operating leverage

Company Description:

B&G makes, markets, and distributes a wide variety of shelf-stable foods, frozen foods, and household goods throughout North America. The company came public in 2004 and grew to 42+ brands through a variety of debt-funded acquisitions. Popular brands include Crisco (acquired from SJM in late 2020), Ortega, Green Giant, Cream of Wheat, Dash (spices and seasonings) etc 

Operations:

2021/22 inflation and supply chain difficulties severely handicapped the company as pricing lagged input costs and margins cratered. Since then the company has increased pricing at double digit rates. However, price increases have been significant;y offset with volume declines and revenue growth has flattened. Effectively, there is a limit to how much pricing can mask the abysmal above industry average volume declines.

Our projected outcome:

Sometime between now and March 2024 the company will need to suspend its dividend ahead of the maturity of its $875mm senior notes due April 2025. ~18 months of FCF at current trends will only reduce the current portion of net debt by ~$150-175mm, leaving the company exposed to ~>$700mm of refinancing, nearly the entire market cap at today’s prices. Undoubtedly, with the company’s revolver and secured Term loan coming due as well, Fed rates at historical highs, and leverage ratios that make lenders wary, pricing will be extraordinarily high and potentially unfeasible considering the cash flow profile. (Note: The notes trade at a relatively small spread to Treasuries relative to the risk profile. There may be opportunity there as well, but as equity investors we are focused on common stock)

Valuation:

What if PE comes in and takes this out? Never say never, but the company’s growth profile is challenged and there’ll be a heavy lift, operationally and financially, taking costs out while spending on brand growth. Currently valued at ~10x EBITDA with minimal runway for growth doesn’t appear awfully cheap when recent transactions have taken place at low teens (see THS’ divestiture of its private-label meal-prep business).

Isn’t the HSD dividend and FCF yield compelling? Yes, if the company had a 5 year runway, not when it has another 20 months until disaster hits.

Covenants:

Credit agreement - FCCR of 1.6X, DSCR of 1.75x, Net Leverage ratio of 7x (beginning in 1Q24)

Debt Stack:

Sales by brand and growth:

Cash Flows:

Catalyst

Debt Maturities and covenants