Tag: MEW

Menu Foods cashes out

Menu Foods is a manufacturer of pet food. They are most famous for an incident in early 2008 where some chemical got into their food supply through imported grain from China which was tainted and caused organ failures in pets. Although they were already on the financial skids in a very low-margin industry (they cut distributions to zero in 2005), this tainted food incident took down their share price down to abysmally low levels and presented a considerable financial risk for equity holders since the company was on the brink of insolvency.

They did manage to stage a partial recovery, but then the global economic crisis hit later in 2008 and early 2009, which brought the common shares once again around the 70-90 cent range.

Investors back then, buying equity, were taking an incredible risk, but it is one that has paid off for them – although the business produces cash flows today, it is slim and they have high leverage given the amount of cash they generate. Still, an investor taking the plunge at a dollar would have seen last Friday over a triple gain on their equity investment.

Today, they will be bought out for $4.80/unit, which if I was holding units, would be selling out with a smile on my face.

I remember looking at the company back in early 2008 and thought they were going to go bankrupt. I also did not put this firm on my candidate list during the economic crisis simply because there were so many other (more solvent) offerings on the market at the time.

What ever happened to Menu Foods?

Menu Foods was a company that ran into a huge amount of trouble for distributing pet food that contained Melamine, which caused kidney problems in pets, sometimes leading to death. The first precautionary recall was in March 2007 and then it took another month for them to isolate what exactly was causing the problem. It was through a supplier, ChemNutra Inc., who used wheat gluten that was imported from Xuzhou Anying Biologic Technology Development Co. in Wangdien, China. The whole history of the case is documented on the company’s website here.

These series of events took the company’s units from seven dollars a share to about one dollar less than a year after the news broke. Financially, the company is not on solid ground – although it was somewhat profitable before this incident (making about $24 million in distributable cash in calendar 2006), its balance sheet was quite leveraged, with a net debt of about $100 million.

Fast forward a few years, it still has the debt – some $105 million. The only difference is that $75 million matures in October 2010. The company breached its covenants in 2007 (primarily due to the aforementioned recall) and as a result had to cut its distributions to zero and pay its creditors a rate of LIBOR plus 5.8%.

Lately, however, the company seems to have recovered from its near-death experience: they have settled the lawsuit, and they are now generating cash again – about $11.1 million in free cash in the first 9 months of 2009. Their units, in response, have gone up from about 80 cents at the beginning of the year to $2.50 currently; at 29.3 million units outstanding, that is approximately a market value of $73 million.

The primary hurdle for Menu Foods at this point seems to be the renegotiation of their $75 million debt. If they can achieve this, then unitholders will be sitting pretty and perhaps distributions could continue after they have continued to deleverage their balance sheet. It is interesting to note that a company that was originally on its deathbed is now positioned to survive, in no part due to investors’ risk preferences being expanded in the zero interest rate environment.