Del Monte to buy Milk-Bone from Kraft for $580 million

Del Monte to buy Milk-Bone from Kraft for $580 million

Del Monte to buy Milk-Bone from Kraft for $580 million

Del Monte Foods Co. announced its second pet food acquisition in just two weeks on Thursday when it said its fully-owned unit, Del Monte Corp., would buy some of Kraft Foods Global Inc.'s pet food products, including the Milk-Bone brand, for $580 million.

The company said the effective cost of the acquisition will be offset by close to $125 million of future tax benefits, which Del Monte expects to achieve as a result of the acquisition. "For Kraft it is definitely a non-core business for them and they were looking to get rid of it. For Del Monte, I think the assets are certainly attractive, but we think the price paid was a bit too expensive," said Longbow Research analyst Alton Stump.

Del Monte -- whose pet food brands include 9Lives, Snausages and Kibbles 'n Bits -- said it sees the transaction as being dilutive to earnings in fiscal 2007, but expects it to be "meaningfully accretive" to earnings in fiscal 2008.

But the company said the acquisition will increase Del Monte's overall gross margin. Pet food typically has higher profit margins than some of Del Monte's other businesses.

On March 2, Del Monte said it would buy cat-food maker Meow Mix Holdings Inc. for $705 million and sell its private-label soup and baby food businesses to focus on its higher-margin branded businesses.

The two acquisitions add heft to Del Monte's pet food business, which could help it compete with larger companies like Nestle SA that makes Purina pet food and Mars Inc., maker of Whiskas.

The Milk-Bone brand, which includes a wide variety of biscuits and treats for pets, generated close to $180 million in net revenue in 2005, Kraft said in a separate release.

For Kraft, the sale of the Milk-Bone brand continues to be a strategy of selling off non-core businesses to focus on products such as Oreo cookies, South Beach Diet foods and Kraft cheese.

Kraft said it sees an asset impairment charge of about 4 cents a share in the first quarter and expects an additional tax expense of 3 cents on closing the deal, adding up to a 7 cent negative impact on 2006.

Kraft forecast ongoing dilution of 2 cents a share.

Del Monte Foods expects to fund the Milk-Bone acquisition with additional debt and added it sees debt levels returning to the current and targeted range within the next three years.

Del Monte's stock was up 1.4 percent at $11.22, while Kraft shares were down 7 cents at $30.07 in morning trading on the New York Stock Exchange.