Del Monte Foods, Inc.'s (DLM), which owns the StarKist tuna brand, expects that near term fluctuations in cash flow generation may result as management has taken a less price promotional approach in some of its categories including StarKist tuna and pet products. The company is expected to generate $3.1 billion in sales, deriving 42% from legacy Del Monte products, 19% from Seafood (mostly tuna), 29% from Pet Products, and 10% from Soup and Infant Feeding.
Good news for the company is that Fitch Ratings has raised its rating on Del Monte Foods, Inc.'s (DLM) senior secured bank facilities to 'BB' from 'BB-' and has affirmed its 'B' rating on the company's subordinated debt. The subordinated debt rating remains unchanged reflecting expected lower recoveries available for subordinated debt holders in a downside scenario. The Rating Outlook is Stable. Approximately $882 million of outstanding debt is affected by the upgrade and $762 million by the affirmation.
This rating action follows the improvement in credit metrics and stability of cash flow resulting from DLM's Dec. 20, 2002 acquisition of H.J Heinz's mature businesses including U.S. Seafood, North American Pet Food and Pet Snacks, U.S. Private Label Soup, and U.S. Infant Feeding. The operations acquired from Heinz are complementary to DLM's and provide more breadth and mass to the fruit and vegetable portfolio, increasing its relevance to the retail trade. In conjunction with the transaction, DLM assumed $1.1 billion of debt and issued 156 million shares valued at approximately $1.2 billion, paying approximately 7.8 times (x) EBITDA for the acquired businesses. Since the closing of the transaction DLM has paid down over $150 million on its bank facilities.
Going forward, higher operating cash flow is expected as a result of the company's substantially larger size, higher margins in the new businesses and strength of DLM's relationships with major retailers. Furthermore, operating cash flow is expected to be more stable as production and demand for the acquired products are less seasonal than those of the legacy portfolio.