Multifoods prepares to play a new game in food business
Ann Merrill
Star Tribune
Published Nov 14 2001
Gary Costley has the ball. Now what's he going to do with it?
Costley, chief executive of International Multifoods Corp.,
completed the acquisition of several Pillsbury and General
Mills brands Tuesday in a $316 million deal that brings
significant change to the $2.5 billion company.
"This gives us a whole new lease on life," Costley said. "We will
never be the same."
Costley, a 58-year-old former business school dean at Wake
Forest University and longtime Kellogg executive, has been
charting a course of change since joining Minnetonka-based
Multifoods nearly five years ago.
At the time, it was an ailing holding company. Costley has
since disposed of disparate operations -- such as selling dark
chicken meat in Russia and hawking telephone poles in China
-- and is steering the company back to its grain-based roots.
Now, armed with well-known brands such as Pillsbury and
Hungry Jack and flanked by the Doughboy icon, he's in the big
leagues. But challenges remain: integrating the new brands
without stumbling and figuring out how to compete against
larger companies such as Golden Valley-based General Mills,
which dominates the baking mix category.
"Strap on the tennis shoes and get running," suggested George
Dahlman, a food industry analyst at U.S. Bancorp Piper Jaffray
in Minneapolis.
Costley acknowledged that Multifoods will be up against
popular brands such as Betty Crocker and Duncan Hines, but
said that size isn't everything.
"It's hard to be nimble when you're that big," he said. "I have
competed against General Mills for most of my adult life. It's a
place for which I've grown comfortable."
Dahlman said he has confidence in Costley and his effort to
transform Multifoods from a low-margin distribution
operation to a branded food company. "I think this is a great
move for Multifoods. It allows the company to move in the
direction it wants to go," he said.
The new brands add about $500 million to top-line sales and
gives Multifoods clout as it strives to become a bigger player in
the U.S. packaged foods industry.
Costley's game plan for changing the company includes adding
more employees and bringing in seasoned veterans he knows
and trusts.
The acquisition will add about 100 employees -- the vast
majority from Pillsbury -- to Multifoods' roster in the Twin
Cities. Nearly two dozen Pillsbury sales representatives will join
the existing sales team around the country. Another 250
workers will be added in about a year when a General Mills
plant in Toledo, Ohio, is turned over to Multifoods after major
renovations. Currently, the company has 4,900 workers, 190 in
the Twin Cities.
"The talent infusion is enormous," Costley said.
The acquisition also has given Multifoods credibility as it
searches for leadership, Costley said. He's bringing on Dan
Swander as president and chief operating officer and Daryl
Schaller as vice president of research and development.
Swander, 58, most recently was chairman and managing
director of San Francisco-based Sander Pace & Co. and a
principal of Kurt Salmon Associates, a food industry consulting
firm.
Schaller, 58, is a 25-year Kellogg veteran who has had a hand
in the majority of new product introductions in the past 15
years, according to Costley, who is looking to Schaller to keep
new Multifoods products in the pipeline.
"Without the deal, I couldn't attract this kind of talent," he
said.
As expected, Multifoods will spend the next several months
working on integrating the new businesses. About half of the
new products eventually will be produced at the Toledo plant,
while the other half will continue to be made at other plants
through a contract relationship.
The company's purchase agreement, first announced in
February, was sweetened over time under pressure from the
Federal Trade Commission as it studied General Mills' plan to
buy Pillsbury from London-based Diageo Plc.
Multifoods has several factors in its favor as it swallows the new
brands, Dahlman said. Diageo is guaranteeing $200 million of
Multifoods' total financing capacity of $650 million, which will
reduce the company's interest costs, he said. In addition,
General Mills and Diageo are putting $10 million in escrow for
Multifoods to finance, if it chooses, a direct sales force.
Moody's Investor Service, however, was less upbeat about the
deal, noting Tuesday that the acquisition increases Multifoods'
debt by nearly 170 percent by adding more than $340 million
in additional borrowings.
Multifoods' "overall business will lack the scale, diversity and
financial flexibility of other much-larger food-processing
competitors. The categories in which it competes are also very
mature, and exhibit little organic growth," according to
Moody's. The agency rated Multifoods' new secured bank debt
Ba2.
Multifoods spent the past year focusing on the acquisition of
the new brands. As it begins the integration, it also will devote
more attention to figuring out what to do with its vast
distribution business, Costley said. The unit, which ships
products such as Snickers candy bars and Frito-Lay chips to
vending machines, accounted for 80 percent of Multifoods'
sales in fiscal 2001, but only about 25 percent of operating
earnings.
The company Tuesday revised fiscal 2002 earnings estimates
downward to 80 cents to $1 per share before unusual items. It
was the second time it had done so: In July, earnings were
estimated at $1.45 to $1.50 per share, then scaled back to $1.25
to $1.35 in October.
Multifoods blamed the change on a variety of factors, including
the later-than-anticipated closing date for the acquisition and
the lack of contribution from the new businesses during the key
holiday period, additional costs incurred to complete the
transaction, current economic weakness, lower-than-expected
sales in its food-service manufacturing business and a decline
in the Canadian dollar.
The company's third-quarter results will include one-time
pre-tax charges of $9.5 million to $11.5 million related to the
acquisition. Multifoods plans to announce third-quarter
earnings on Jan. 9.
-- Ann Merrill is at amerrill@startribune.com .
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