Inflation putting pressure on heavily indebted Valeo Foods

S&P has issued a warning and downgrade for the debt-laden owner of Jacob’s biscuits, Kettle Crisps and numerous other well-known food brands as inflation eats away disposable income.

he agency cut its credit rating for Valeo Foods Friday, citing its high debt levels and reduced profitability following its leveraged buy-out by US private equity firm Bain Capital last year.

S&P increased its estimate for Valeo’s debt load this year to 9x earnings, but said the company still had a stable outlook and wasn’t facing any refinancing risk.

“High operating cost inflation, the customary – albeit reducing – time lag in passing on price increases, and integration costs are pressuring Valeo Foods’ profitability,” S&P said in a research note.

“In addition, debt levels have increased following debt-funded acquisitions while the capital structure formed in 2021 was already highly leveraged.”

While S&P said demand was steady for the ambient foods in Valeo’s product range, which also includes brands such as Odlums, Kelkin and Shamrock, consumers were seeing their disposable income decreasing in the main UK and Ireland markets.

Kantar found in its most recent grocery survey that Irish shoppers were responding to 5.5pc food inflation by cutting back on branded items,

The market research firm said the branded share of the typical shopper’s basked had fallen to 49pc this spring after being above 50pc through 2020 and 2021.

S&P said Valeo had not yet realised cost savings from recent acquisitions and was only achieving revenue growth in line with inflation, meaning profit margins were not expanding.

As a result, the company’s debt leverage has drifted higher than forecast for this year while projected free cash flow has fallen from €40m-€50m to just €10m-€20.

S&P said Bain’s track record of putting through price increases gave it comfort that Valeo will be able to “contain” margin pressures over the next 18 months.

Dublin-headquartered Valeo was formed in 2010 through the merger of Origin Foods and Batchelors by private equity firm CapVest.

CapVest grew the Irish-only business into a major force in ambient food over more than a decade, making 17 acquisitions and increasing sales to €1.1bn across 106 markets.

The company was sold last May to Bain Capital, the owner of Burger King, Dunkin’ and Domino’s Pizza, in a deal estimated at €2bn.

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