What’s next at TreeHouse Foods, Inc.?

Interest in the suburban Chicago-based company’s next moves has been high in the weeks since TreeHouse’s top executive told investment analysts the company had the financing and the interest to make significant moves in merger and acquisition markets. If the company emerges as a major buyer, TreeHouse will be building on a series of earlier transactions that have transformed the business in its relatively short 10-year history.

In early May, the company detailed a $1.2 billion financing structure that included a new $900 million unsecured revolving credit facility together with a $300 million seven-year loan. Sam K. Reed, chairman, president and chief executive officer, said the financing reflected a fundamentally different environment for the merger and acquisition market.

TreeHouse Foods net income

“I think that the market is characterized by, one, a continuation of readily available funding for deals of practically any size, and what is different now than we’ve had in earlier periods when money was also relatively cheap, is that we are seeing more sellers come to the marketplace and in a greater variety,” Mr. Reed said. “There are private equity groups that are looking to monetize long-term holdings, and importantly, establish a basis for raising new funds.”

The degree to which TreeHouse has changed over its history may be seen in the position of its heritage product — pickles — today versus when the company filed its first 10-K report with the Securities and Exchange Commission in 2006 after becoming a standalone publicly-traded company. Pickles accounted for nearly half (48.8%) of the company’s pro forma sales in the year ended Dec. 31, 2004. By contrast, in 2013 pickles were the company’s fourth largest category, accounting for only 13% of the sales total.

TreeHouse Foods share price

The company has become a major supplier of private label foods in categories such as salad dressings, beverages, pickles, sauces, cereals and other items.

Based in Westchester, Ill., the company was formed in January 2005 as a spin-off from Dean Foods Co. At the time, Dean distributed to shareholders its Specialty Foods Group segment as a standalone business, a transaction completed in June of that year. The pickle business was relatively new to Dean, acquired in 2001 when Suiza Foods Corp. acquired Dean Foods and later assumed Dean Foods as its corporate name. The “original” Dean Foods, in turn, had entered the pickle business in 1962 when it acquired Green Bay Foods Co., a company with roots in the business dating back to the 1860s. By the time it was spun off from Dean Foods, TreeHouse described itself as the largest manufacturer of pickles in the United States, as measured by total sales.

The other half of TreeHouse’s business in 2006 was in several products — powdered non-dairy creamer, sauces, syrups and other specialty food products. From the time it became a standalone business, the company made it clear it did not intend to remain primarily a pickle business.

“Our strategy is to optimize our current business and grow through acquisitions,” the company said in 2006.

“We expect to focus initially on acquisitions within our current product categories, as well as adjacent categories,” the company continued. “We successfully acquired and integrated seven acquisitions with total annualized sales of over $200 million in both pickles and non-dairy creamer between 1997 and 2004.”

Within a year of the spin-off, TreeHouse completed its first major acquisition, buying the infant feeding and food service and private label soup business of Del Monte in a $268 million transaction. Numerous transactions, larger and smaller, followed in the years afterward (see sidebar on Page 40).

The importance of growth through acquisitions has been emphasized by the company throughout its history.

“Since we began operating as an independent company in 2005, our acquisitions have significantly added to our revenue base, enhanced margins and allowed us to expand from an initial base of two center-of-store, shelf stable food categories to eight, including Sturm,” the company said in 2010.

By certain key measures, the company’s strategy has been highly successful. From the time the company’s 2005 spin-off from Dean Foods was completed in June 2005, the company’s shares have risen in value by 170%, versus a 63% gain by the S.&P.500. The share price jump has been greater than some, not all, other diversified companies, including PepsiCo, Inc., up 109% over the same period; ConAgra Foods, Inc., up 72%; and Campbell Soup Co., up 91%. Over the past year, TreeHouse shares have climbed 19%, slightly behind the S.&P.500 gain of 21%, but better performance than any other diversified food company tracked by Food Business News except Hain Celestial, up 33%.

By other measures, the success of the company’s spate of acquisitions has been more difficult to discern. While the company’s sales in the year ended Dec. 31, 2013, at $2,293,927,000 were up 52% from 2009, net income was up a more modest 7% from four years earlier. Net income during this period fluctuated between a low of $81.3 million in 2009 to a high of $94.4 million in 2011.

Mr. Reed in May offered a glimpse into criteria TreeHouse may consider when it comes to acquisition candidates.

“What you would like to see is a substantial category that still has growth, that still has opportunity for segmentation, that there is a great branded leader pioneering in innovation and consumer communications via advertising or other means, and that there is a big enough profit pool that you want to split the profits,” he said. “So a portion like single-serve coffee as opposed to big cans of ground coffee.

“Then lastly, you want to have an instance where either a private label presence has been created or can be consolidated. Those are the constants.”