Description

For potential BDC investors, yield hogs, or other investors looking for a definable investment proposition focused on current cash-on-cash returns I offer up B&G Foods – yielding 13.4% on your purchase price of $12.80 per share. As additional opportunity (or alternatively a margin of safety)– the equity “stub” may offer upside of 100% appreciation or more to the investment thus achieving 20% - 25% annual returns over the next three to four years.

The ticker "BGF" represents an EIS (Enhanced Income Security) in B&G Foods, a manufacturer and distributor of a diverse portfolio of shelf-stable foods. The general structure of the security is well recognized in Canada (as is evident by issambres839's recent write-up on Student Transportation) but is relatively new (and thus far not well received) for US companies. Each EIS in B&G represents one share of Class A common stock AND a 12.0% senior subordinated note with $7.15 principal amount. (See below for breakdown of the capital structure)

Yes you are thinking to yourself correctly – the debt portion of the security is priced to yield 12% yet the combined equity/debt security is yielding 13.6%. Not often you find an equity investment with an implied dividend yield of 15.0%, well, unless you're trolling the pre-bankruptcy waters.

Further, sloppy work by the "information reporting providers" (ie., Schwab, Bloomberg, Reuters, Yahoo, Multex, – hereafter "IRP's") and some of the larger Street firms virtually guarantee that B&G will be missed by only the most diligent financial metric-screeners.


Brief Business Description:

B&G Foods manufactures, sells and distributes a diverse portfolio of shelf-stable foods across the United States, Canada, and Puerto Rico. Products include Mexican-style sauces, pickles and peppers, hot sauces, wine vinegar, maple syrup, fruit spreads, pasta sauces, beans, spices, salad dressings, taco kits, etc – you get the idea. B&G competes in the retail grocery, food service, specialty store, private label and mass merchandiser channel. The products are marketed under many recognized brands including Emeril's, Ortega, Las Palmas, B&M, Red Devil, Maple Grove Farms of Vermont, Ac'cent among others. In general, B&G's position is to appeal to the consumer desiring a high quality and reasonably priced branded product. Many of these have leading share in B&G's markets or are top three in share nationally/regionally.

Last 3 years summary info:

Revenue:
2004 - $373
2003 - $328
2002 - $294

EBITDA:
2004 - $70 (adjusted for non-recurring comp expense at IPO)
2003 - $61.8
2002 - $53.9

Capex:
2004 - $6.6
2003 - $6.4
2002 - $6.3

In late 2004, B&G was part of a recapitalization. Skipping all the messy details, the Company issued the EIS securities and repaid outstanding debt and cashed in (to varying degrees) a number of private equity type investors. The structure of the security is comprised of an interest-paying subordinated note and a dividend-paying common share, similar as to respective priority of claims, or other rights, to the corporate debt and common equity of any standard publicly traded corporation. The uniqueness of the EIS is simply that the two component securities are “clipped” together and trade as a single unit.

The capital structure is as follows:

Debt
Senior Subordinated Debt (not linked to Class A shares)
- $240 million at 8% matures 10/2011
- $20 million at 12% matures 10/2016
Senior Subordinated Debt (linked to Class A and part of the EIS)
- $145 million at 12% matures 10/2016. ($7.15 per EIS unit of 20 m

Equity
Class A shares – publicly traded as part of the EIS unit (20 million outstanding) with a dividend rate of $0.85 per share.
Class B shares – held by management, prior investors, etc. (7.7 million outstanding). Class B shares only receive dividends upon achievement of certain ebitda and Class A dividend hurdles being met. (Needless to say, management is motivated to achieve those targets to the benefit of the A shares)


Investment Thesis Summary

One, I view B&G as a single entity BDC type investment. The typical BDC investor invests in a management/holding company that makes investments that often take the form of debt and equity. With B&G you have the opportunity to make a BDC type investment without the drag of BDC management. You earn the cash-on-cash return and you have equity upside due to ebitda multiple expansion (see below) and as the business grows or debt gets refinanced.

Two, the current payout to EIS holders is sustainable, thus providing a definable investment return in the mid-teens which is favorable to the current turmoil in the equity markets. This is fairly straightforward. At $70 million in ebitda all interest and dividend payments will be made. You will earn in excess of 13% return. The downside is limited by the current yield.

Three, the IRP's are incorrectly reporting the capital structure of B&G, thus overstating screening metrics based on enterprise value and market capitalization. By how much you ask? Well, the IRP's report an enterprise value of approximately $740 million when it is actually $540 million. This requires a bit of explanation and supports the other two theses.


IRP’s / Financial Information Advantage

As stated above I believe B&G suffers from an informational problem caused by the Information Reporting Providers. Enterprise value as reported is very simply WRONGLY stated at $740 million. How do they get there?

27.7 million "shares" (emphasis added) outstanding times the $12.80 share (EIS) price to get $355 million in equity market cap, then add the $405 million in debt, subtract the $20 million in cash and you get $740 enterprise value.

THE PROBLEM?!

The "share" (emphasis added) price includes $7.15 of sub-debt principal! Thus, real enterprise value should be:

Shares 27.7 * $5.65 ($12.80 EIS price - $7.15 sub-debt portion) = $155 million for the equity (not $355!)

The rest is the same: $155 + $405 debt - $20 cash = $540

Enterprise value is thus overstated by approximately 40% or $200 million – and accordingly, so are all the multiples.

So you have a conundrum.

Does the market truly believe B&G should have an enterprise value of $740 based on the IRP's information? If yes, once the IRP's wake up to their problem in reporting - the EIS should immediately pop to $19.00 as follows:

$740 EV - $405 debt = $335 for equity.
$335 / 27.7 shares = $12.00 for the equity plus the $7.15 sub debt piece = $19.15.

Or, do the market transactions / individual investors have it right (they are smart enough to ignore EVERY SINGLE IRP report???) and EV is $540 million. If that is the case - I would say that the B&G EIS equity “stub” still offers 50% upside using industry average ebitda multiples.

The Reasonable Value?

Given Company efforts to push through price increases, a return to a more normal operating environment, and modest success with a product extension from existing brands I believe B&G is capable of $70 million in run rate ebitda and growing starting now. A 9 multiple on that number yields an Enterprise Value of $630. The multiple is an eyeball number based on the following:

SJM 9.8
SLE 8.5
HAIN 10.9
LNCE 8.3
JJSF 7.3

And considering the respective positives and negatives at each (and noting particularly that JJSF doesn’t have the “brand” lineup of B&G).

A 9 multiple has the effect as follows:

$70 x 9 = $630
Minus $405 (debt)
Plus $20 (cash)
= $245 for the equity or

$8.80 for the “equity stub”
Plus the $7.15 “debt stub” (the $405 debt number).
= $15.95

Ironically – right around where it went public. So this “heroic” return to its approximate IPO price over

One year = a total return of 38%
Two years = 25%
Three years = 21%

With a downside that is protected by continued dividend payments. Correspondingly, if you buy the EIS and split off the debt at par you are buying the equity at $5.65 with a fair value of $8.80 for a total return of 56% for one year.



RISKS:
B&G has demonstrated recent success in pushing through price increases – the question is will it stick?
This year's dividend is tight (though on most recent call they expect to fund dividend entirely from operations and not dip into the $20 million cash to fund the
dividend.)
Continued cost pressures (energy, materials, etc.) not managed effectively

Catalyst

Catalysts:
- Company maintains payout and attracts yield conscious investors.
- “B” Shares want to get paid creating incentive to maintain “A” Shares payments.
- Information arbitrage - diligent analysts uncover the misreporting of Schwab, Reuters, Bloomberg, Yahoo, Multex, etc. and recognize the underlying equity value.
- Continued improvement in operating results and multiple expansion.