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Thursday, April 4, 2013

Pinnacle IPO to Test Appetite

NEW YORK–Thursday's initial public offering for frozen foods purveyor Pinnacle Foods Inc. is setting up to be a test of how much investors are willing to pay for a company that offers a hefty dividend but comes saddled with debt and limited prospects for growth.

The maker of Van de Kamp's fish sticks and Lender's frozen bagels is slated to set a price for its IPO late Wednesday, a deal that is likely to be the year's third-largest IPO. Shares are expected to fetch between $18 and $20 per share and could raise as much as $580 million.

Pinnacle, which is backed by Blackstone Group LP, is the latest in a string of deals brought to market this year by sponsors including private-equity shops or venture capital firms. Blackstone bought Parsippany, N.J.-based Pinnacle for $2.16 billion in 2007. It added Birds Eye Foods Inc. in 2009 with a $1.3 billion deal.

Pinnacle said in its prospectus that it's targeting an 18-cent quarterly dividend, which would imply a 3.8% annual yield based on the midpoint offer price. That compares with a 2.2% dividend yield on stocks in the Standard & Poor's 500-stock index. With interest rates at rock bottom, high-dividend paying stocks have been commanding a premium from investors.

"I would be surprised if it doesn't price at the top end of the price range or above that," said Josef Schuster, founder of IPOX Schuster LLC, an IPO research-and-investment firm based in Chicago. "It's a stable business and has good brand value. I think investors are also looking at it for the dividend yield," he said.

Mr. Schuster's fund, the $67 million First Trust U.S. IPO Index exchange-traded fund, doesn't participate in first-day IPO trading, but said he is looking hard at adding shares in the coming weeks.

Another potential positive for the deal is that investors have been taking a shine to IPOs brought to market by financial sponsors such as Blackstone. Thirteen such deals have generated an average first-day gain of 20%, compared with a 14% first-day pop for all initial offerings, according to Ipreo, a market intelligence firm.

On the potential negative side of the ledger, Pinnacle's brands–which also include Vlasic pickles and Celeste pizza–are widely known, but its sales have mostly been flat. The company booked $2.5 billion in sales in the 2012, up 0.4% from the year earlier.

Then there's the debt: As of the end of last year, its total debt stood at $2.1 billion, or about five times 2012's adjusted earnings before interest, taxes, depreciation and amortization.

But leverage hasn't been much problem for recent IPOs. With the Federal Reserve expected to keep interest rates low, investors have relegated concerns about debt loads to the back burner.

For example, Realogy Holdings Corp., a real-estate services firm that owns and franchises brokerages including Century 21 and Coldwell Banker, had net leverage of more than seven times its forward Ebita when it went public in October. That deal, which was backed by private-equity firm Apollo Global Management LLC, fetched a price at the high end of its prospective range and shares are up more than 80% since their IPO.

In Realogy's case, investors jumped at the chance to play an IPO tied to a broader recovery in the housing market, observers say. Stocks like plywood maker Boise Cascade Co. and Tri Pointe Homes LLC have seen strong stock gains after their IPOs this year.

Analysts also note the consumer-staples sector generally tends to be more supportive of debt loads because sales, even if uninspiring, are usually relatively stable.

"The food industry is an example of an industry with relatively low operating risk. So food companies, whether it's Heinz, or Pinnacle Foods, can support higher debt ratios than companies in more cyclical industries," said Jay Ritter, a finance professor at the University of Florida who tracks IPOs.

Pinnacle will list Thursday on the New York Stock Exchange under the ticker PF and would carry a market value of $2.2 billion at the high point of the prospective price range.

Write to Chris Dieterich at chris.dieterich@dowjones.com or Matt Jarzemsky at matt.jarzemsky@dowjones.com

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