ST. LOUIS — After months of exploring structural alternatives for its private brands business, Post Holdings, Inc. on Aug. 2 announced it has partnered with private equity firm Thomas H. Lee Partners, L.P. (T.H.L.) to form 8th Avenue Food & Provisions.
Under terms of the transaction, Post is expected to receive total proceeds of $875 million, fully monetizing the net investment Post has made in its private brands business. Final proceeds are anticipated to be funded by $250 million from T.H.L. and 8th Avenue’s assumption of $625 million of debt.
Post is expected to retain 60.5% of the common equity in 8th Avenue, while T.H.L. will receive 8th Avenue preferred stock with an 11% PIK-equivalent, cumulative, quarterly compounding dividend and 39.5% of the common equity in 8th Avenue.
Post said it plans to use its net proceeds to pay down a portion of its existing approximately $2.2 billion term loan, reducing its pro forma net leverage ratio to 5.5x.
James E. Dwyer, who was named head of Post’s private brands business back in January, will continue as president and chief executive officer of 8th Avenue.
“T.H.L. has governance rights over key decisions involving capital allocation and changes in management,” Robert V. Vitale, president and chief executive officer of Post, said during an Aug. 3 conference call with analysts. “This structure preserves Post’s ability to tax-efficiently distribute its remaining position in 8th Avenue to Post shareholders. Most importantly, this transaction enables 8th Avenue management to focus solely on the private brands consolidation opportunities and enables further direct access to capital.
“We are quite pleased with this outcome, and we are delighted to partner with a firm the caliber of T.H.L. They have deep experience in building consumer platforms. Both Post and T.H.L. are fortunate to be supporting Jim Dwyer and his team. T.H.L. was a Michael Foods shareholder when Jim was c.e.o. of Michael Foods.”
Mr. Vitale said Post compared a partnership with a private equity firm to a carveout initial public offering, ultimately deciding to pursue the former.
“We believe this structure provides the optimal balance in achieving our objectives,” he said.
Post’s private brands segment, which includes the company’s nut butter, pasta and granola, dried fruit and nut snacks businesses, posted operating income of $12.7 million in the third quarter of fiscal 2018 and $43.8 million in the first nine months of the year, which compared with $13.1 million and $41.2 million, respectively, in the same year-ago period. Net sales for the unit totaled $209.1 million in the third quarter and $628.1 million in the nine months, up from $192.3 million and $585.9 million, respectively.
Boston-based T.H.L.’s portfolio includes processed food supplier CTI Foods Holding Co. and pet food distributor Phillips Pet Food & Supplies.
News of the creation of 8th Avenue came on the same day Post announced third-quarter financials.
Net income in the third quarter ended June 30 totaled $94.5 million, equal to $1.41 per share on the common stock, which compared with a loss of $62.8 million in the same period a year ago. The most recent quarterly results included a $17.2 million gain primarily related to non-cash mark-to-market adjustments on interest rate swaps.
Net sales increased 26% to $1,608.1 million from $1,272.1 million.
Operating income in the Post Consumer Brands business totaled $83.3 million in the third quarter, down 14% from $96.9 million in the same period a year ago. Net sales in the segment increased 9% to $427.3 million.
Mr. Vitale said the company’s U.S. cereal business had solid sales gains and strong consumption but transitory pressure on margins.
“A high level of new product introductions pressured realized prices,” he explained. “First, we incurred high levels of new product introduction costs directly tied to distribution gains. More significantly, new products were heavily promoted, and as a result, our percentage of sales on promotion increased meaningfully and reduced the overall favorable mix benefit. We believe this promotional strategy is instrumental in supporting our new product launches. The customer support has been quite strong, and we are optimistic about the products, but clearly, this level of promotion pressured our current quarter margins.”
Mr. Vitale said a more significant impact was felt in cost of goods sold, where Post incurred $14 million of unusual costs during the quarter. He identified the unusual costs as an unplanned shutdown at the company’s facility in Battle Creek, Mich., timing on the insourcing of co-manufacturing for new peanut butter-based products, higher-than-planned start-up costs for new products and inefficiencies around display module assembly.
Elsewhere in Post’s business, the company’s Weetabix segment posted a profit of $26.1 million in the third quarter on sales of $107.1 million.
“Weetabix performance was consistent with our expectations for the quarter,” Mr. Vitale said. “Our promotional reset is having the expected result. Pricing is improving, partially offset by some volume declines. The U.K. market remains choppy, and private label maintains momentum.”
Operating income in the Refrigerated Food segment increased 37% during the quarter to $56.5 million, up from $41.2 million, while sales rose 32% to $613.1 million from $464.5 million.
“Michael and Bob Evans both had strong quarters in terms of revenue growth, margin management and progress toward synergies,” Mr. Vitale said. “This performance is despite the quarter being hit by $3.5 million from the announced incidents at two precooked egg facilities. We continue to track to our increased synergy targets and remain highly optimistic about this combination.”
The company’s Active Nutrition segment posted operating income of $40.2 million in the third quarter, up 44% from $28 million a year ago. Net sales in the segment also improved, rising 15% to $216.4 million from $188.7 million.