S&P has issued a warning and downgrade for the debt-ridden owner of Jacob’s cookies, Kettle Crisps and many other well-known food brands as inflation eats away at disposable income.
The agency downgraded Valeo Foods’ credit rating on Friday, citing its high level of debt and reduced profitability following its leveraged buyout by U.S. private equity firm Bain Capital last year.
S&P raised its estimate of Valeo’s debt this year to 9 times earnings, but said the company still had a stable outlook and faced no refinancing risk.
“High operating cost inflation, the usual – albeit small – lag in pass-through of price increases, and integration costs are weighing on Valeo Foods’ profitability,” S&P said in a research note.
“Additionally, debt levels increased following leveraged acquisitions while the capital structure formed in 2021 was already highly leveraged.”
While S&P said demand was stable for ambient foods across Valeo’s product range, which also includes brands such as Odlums, Kelkin and Shamrock, consumers were seeing their disposable income shrink in key UK and Irish markets.
Kantar found in its latest grocery survey that Irish shoppers reacted to 5.5% food inflation by cutting back on branded items,
The market research firm said the typical shopper’s brand share of the basket fell to 49% this spring after being above 50% through 2020 and 2021.
S&P said Valeo had yet to realize cost savings from its recent acquisitions and was only achieving inflation-in-line revenue growth, meaning profit margins were not rising.
As a result, the company’s debt leverage has exceeded forecasts for this year, while expected free cash flow has fallen from 40-50 million euros to just 10-20 million euros.
S&P said Bain’s track record of price increases gave it confidence that Valeo would be able to “contain” margin pressures over the next 18 months.
Valeo, headquartered in Dublin, was created in 2010 by the merger of Origin Foods and Batchelors by private equity firm CapVest.
CapVest has built the Irish-only business into a major force in ambient food over more than a decade, completing 17 acquisitions and growing sales to €1.1 billion in 106 markets.
The company was sold last May to Bain Capital, owner of Burger King, Dunkin’ and Domino’s Pizza, in an agreement estimated at 2 billion euros.