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Pinnacle Foods Inc (PF): Will This Company Bite Off More Than It Can Chew?

When most investors think of the packaged foods industry, they tend to think of it as a mature, slow-growth sector dominated by conglomerates such as General Mills, Inc. (NYSE:GIS) and Kraft Foods Group Inc (NASDAQ:KRFT). Yet they should pay attention to a new kid on the block, Pinnacle Foods Inc (NYSE:PF), which went public in March at $20 per share and has since risen 20%.

Pinnacle Foods Inc (NYSE:PF), which sells Vlasic Pickles, Duncan Hines, Mrs. Butterworth’s and Swanson TV dinners, is now looking to expand by acquiring two more key brands – Unilever plc (ADR) (NYSE:UL)’s Wish-Bone salad dressing and Del Monte Foods’ canned food business.

If Pinnacle Foods Inc (NYSE:PF) is successful at adding those two businesses to its portfolio, it could seriously boost its long-term growth. However, those acquisitions would be extremely costly for the company, which has fairly low cash reserves and high debt. Let’s take a look at the facts and figures behind these two possible acquisitions to better understand Pinnacle’s future.

A bit of history and fundamentals

Many of Pinnacle Foods Inc (NYSE:PF)’s brands, such as Vlasic and Mrs. Butterworth’s, hold first or second place market share positions across North America. According to the company, 85% of households across the nation own products made by Pinnacle. The company was founded in 1998 as Vlasic Foods International, and grew quickly after acquiring the Swanson TV dinners, Open Pit and Vlasic Pickles brands from the Campbell Soup Company (NYSE:CPB). In 2003, Vlasic acquired Aurora Foods, a former subsidiary of ConAgra Foods, Inc. (NYSE:CAG), and in 2009 it acquired Birds Eye Foods, becoming the fifth largest frozen food manufacturer in America.

Pinnacle Foods Inc (NYSE:PF) has also invested heavily in improving its acquired products. Through its R&D investments, the company created customized frostings with Duncan Hines Frosting Creations, higher quality pickles from Vlasic Farmer’s Garden, and family-sized frozen bagged meals at Bird’s Eye. The company’s annual gross sales from products launched within the past three years have risen 9.4% since 2009, suggesting that its dedication to constant innovation has paid off. Between fiscal 2008 and 2012, the company’s revenue rose 59% to $2.5 billion as adjusted EBITDA surged 91% to $426.1 million.

Although Pinnacle’s cash flow was most recently reported at $236.7 million, it only has $132.09 million in cash and equivalents. On top of that, it is still shouldering $2.61 billion in debt. Those figures bring us to the central question of this article – can Pinnacle afford to continue expanding through acquisitions?

Breaking the wishbone

The first brand Pinnacle is interested in acquiring is Unilever plc (ADR) (NYSE:UL)’s Wish-Bone salad dressing. Over the past several years, Unilever has been selling off its packaged food brands to focus on selling personal care products to emerging markets. Unilever’s well-known products include Dove, Vaseline, Lipton, Hellmann’s and Ben & Jerry’s. The company currently generates 56% of its global revenue from emerging markets, where it competes against other Western consumer staple giants like The Procter & Gamble Company (NYSE:PG) and Colgate-Palmolive Company (NYSE:CL).

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