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Del Monte might be purchased

Investment company KKR & Co. is in advanced discussions to acquire Del Monte Foods Co. in a deal that would give the New York buyout firm pet-food brands such as Meow Mix and Kibbles ‘n Bits, according to two people familiar with the matter.

A deal may be reached in the coming weeks, said the people, who declined to be identified because the talks are private. The Financial Times reported the parties are discussing a price of about $18.50 a share, valuing the company at $3.6 billion.

A transaction would give KKR a pet-food business whose sales have more than doubled since 2006, helped by the acquisitions of labels like Meow Mix cat-food and Milk Bone dog treats. Revenue in the division rose to $1.75 billion in the year ended May 2, accounting for about half of sales.

Del Monte, based in San Francisco and with an operations center on Pittsburgh’s North Shore “has strong cash flow and has taken down its debt levels, so it is well positioned as a takeout candidate,” analyst Farha Aslam of Stephens Inc. said. “We believe the value of the pet-foods business was not being reflected in the stock.” The New York-based analyst changed her rating on the shares from buy to “equal weight.”

A deal could still fall apart, according to the people. San Francisco-based Del Monte climbed $1.80, or 11 percent, to $17.51 a share Friday. The gain was the largest since February 2009.

Del Monte originally came to Pittsburgh in 2002 when it acquired four divisions from H.J. Heinz Co. for $2.5 billion. The deal included Heinz’s North Side manufacturing facilities. In 2006, Del Monte sold the North Side plant, baby food and unbranded soup units to TreeHouse Foods Inc. of Westchester, Ill. In 2008, Del Monte sold Starkist Co., now headquartered here, to South Korean conglomerate Dongwon Enterprises Co. Ltd.

Del Monte has more than 300 employees in Del Monte Center on the North Shore.

The pet-food industry has been consolidating, with Nestle SA, the world’s largest food company, buying dog-snack maker Waggin’ Train LLC from private equity firm VMG Partners in September. In May, Procter & Gamble Co., whose pet-food brands include Iams and Eukanuba, agreed to acquire closely held Natura Pet Products Inc. for an undisclosed sum.

Del Monte’s consumer business, which makes canned fruits and vegetables, accounts for the rest of its sales. Revenue in the division climbed 1.9 percent last year, less than half the pace of the increase in pet foods.

“When a world-class business is devalued by a smaller, less attractive business, enterprising minds will think breakup,” Tim Ramey, an analyst at D.A. Davidson, said in a note to clients, referring to the pet-food division. “You could justify the valuation of Del Monte on the pet-foods business alone.” The Lake Oswego, Oregon-based analyst recommends buying the shares.

Earlier this year, Del Monte Chief Executive Officer Richard Wolford said he was considering more acquisitions to expand the pet-food unit. Two areas of focus are pet snacks and more upscale, specialty pet-food brands, he said.

A buyout of Del Monte by KKR would be at least the second private-equity food deal this month. On Nov. 5, Lion Capital LLC of London said it would acquire canned-seafood maker Bumble Bee Foods LLC from New York buyout firm Centre Partners Management LLC for $980 million.

This isn’t the first time Del Monte and KKR have been linked. After the private-equity group’s $25 billion buyout of RJR Nabisco two decades ago, KKR sold the Del Monte canned-foods business to an investor group led by Merrill Lynch, according to Del Monte Foods’ website.

Buyout firms use a combination of their own funds and debt to pay for takeovers and then seek to improve profit by boosting sales, selling assets and cutting costs. The firms typically sell the companies within five years.


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