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Hungry for Pinnacle Debt

NEW YORK (TheStreet -- It's a perfect time for Blackstone (BX) to unload Pinnacle (PF) from its books. Warren Buffet's purchase of Heinz (HNZ) foods has given the food group a seal of approval. Pinnacle may be loaded with debt, but new investors will ignore that stark reality. Sources say the deal is oversubscribed by four or five times.

Blackstone purchased Pinnacle in 2007 for $2.16 billion with the plan to make more acquisitions and build the company into a food powerhouse. This was so long ago that Lehman Brothers was the adviser on the deal. The only acquisition ever completed was Birds Eye Foods, purchased for $1.3 billion. Now Blackstone is hoping to raise $667 million from the initial public offering, which basically values Pinnacle at $2.3 billion. Not such a great six-year return.


On a positive note, it doesn't expect to sell on the offering and Blackstone will keep a 68% ownership stake. The debt is the big burn mark on an otherwise tasty company. The company has only paid back $350 million of the $3 billion in debt incurred in connection with Blackstone and Birds Eye. This payback might have been difficult since net sales from 2008 to 2012 of the Leadership Brands (its top products) grew only 2% -- essentially flat. Plus, since Blackstone will continue to own 68%, they could potentially force Pinnacle to take on more debt.

In addition to the well-publicized debt levels, another item that has gotten less attention is the pension plan, underfunded by $98 million as of December 2012. Pinnacle states in its S-1 filing that its obligation to make pension contributions can reduce its working cash. Fifty-three percent of its employees are union workers and Pinnacle's contributions to the pension have slid in recent years from $8.9 million in 2010 to just $3 million that is expected for 2013. It could be that Blackstone has backed off of the contributions in order to dress up the balance sheet.


On the product side, things are pretty positive. Wal-Mart (WMT) accounts for 60% of the sales. The company owns many iconic brands like Mrs. Paul's frozen fish, Aunt Jemima, Birds Eye frozen foods, Lenders Bagels, Duncan Hines and Vlasic pickles. Many of these products have a commanding market share and either rank No. 1 or No. 2 in their respective categories. The brands are familiar and iconic, so that the company is reminiscent of B&G Foods (BGS).

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