by Maureen Flanagan
Middleby Corporation (Nasdaq: MIDD), a leading designer, manufacturer, and distributor of commercial cooking and warming equipment, is cooking along with a new acquisition that doubles the size of the company. In a December 21, 2001 transaction, Middleby acquired G.S. Blodgett Corporation, a subsidiary of the Maytag Corporation since 1997 and a well-known brand of cooking equipment. American Capital Strategies (Nasdaq: ACAS) supported the acquisition through a $33 million financing package.
"This strategic purchase makes Middleby the leading producer of commercial cooking and warming equipment in North America," said Selim Bassoul, Middleby's President and CEO. "The acquisition creates a strong combination of complementary products with leading brands in all major segments of the industry. It also broadens the company's customer base and offers significant opportunities for cost savings."
Headquartered in Elgin, IL, Middleby has 10 offices worldwide and distributes its products to more than 100 countries. The company's products are marketed under the Middleby Marshall, CTX, Toastmaster and Southbend labels. They are vital to the cooking operations of top pizza chains, such as Papa John, Pizza Hut and Dominos, and are widely used by quick service, casual dining and institutional food purveyors. Products sold to these markets include conveyor ovens; light- and medium-duty electric equipment, including pop-up and conveyor toasters, hot food servers, foodwarmers, griddles, convection ovens and ranges; and heavy-duty gas fired equipment. This equipment comes in a range of sizes and is often custom made to the needs of the customer.
A significant part of the business is the company's worldwide integrated export management and distribution services, offered through Middleby Worldwide. In addition, Middleby Philippines Corporation manufactures and installs modular foodservice equipment and kitchen fabrications for Asian operations of major U.S. and international foodservice chains.
The Blodgett acquisition brings to Middleby a complementary product line, new customers and a top brand name of cooking equipment that is well regarded in the industry. Founded in 1848, Blodgett Ovens produces convection and deck ovens (approximately 70% of the product line's sales), as well as conveyor ovens in a full range of sizes. Blodgett Ovens serves a broad customer base including chain restaurants, full service independent restaurants and institutional markets. Pitco Fialator, Blodgett's largest operation, is a leading producer of fryers in North America and has a record of consistent innovation, offering a variety of customized products at multiple price points.
Blodgett has captured the largest share in several major market segments: Blodgett Combi is the country's most popular combination hot air/steam convection ovens and Magikitch'n is the leading brand of high-quality commercial charbroilers. Blodgett's diverse customer base operates in almost every commercial and institutional channel of the commercial foodservice equipment industry. Primary customers include Kentucky Fried Chicken and McDonalds.
To support the acquisition, American Capital provided financing of $33 million that included $25 million of senior debt and $8 million of junior subordinated debt. Bank of America, NA also provided senior term financing.
American Capital invests senior and subordinated debt in middle-market companies in need of capital for growth, acquisitions, employee and management buyouts, liquidity and recapitalizations. Since 1997, ACAS has invested more than $900 million in 59 companies in a wide range of industries.
"The acquisition significantly enhances Middleby's position for growth and new opportunities just as the food service industry begins to recover from the weak market conditions of 2000 and 2001," said Gordon O'Brien, ACAS Principal.
In 2000, the domestic foodservice equipment industry was a $7.9 billion business. The industry is affected by the general state of the restaurant industry and correlates highly with the country's general economic condition. Growth was strong in the 1990s, but persisting weakness and recent political events have had a negative impact on consumer restaurant spending. During 2001, the industry experienced a 10% drop in sales as restaurant operators scaled back purchases of cooking equipment.
As the economy recovers, on-going economic problems are expected to have less impact on the quick service and casual dining restaurants that form the company's principle customer base. These types of restaurants, in fact, are expected to grow about 2% in 2001.
The long-term the prognosis is even more optimistic. According to the National Restaurant Association, from 2000 to 2010 restaurant sales will grow at a compound annual rate of 4.4%, from $376 billion to $577 billion. During this time, the number of restaurants is expected to increase almost 2% annually, and the percentage of restaurant spending to total food expenditure is forecast to rise from just over 45% to 53%.
With an improved economic outlook, restaurant owners are typically more inclined to replace existing equipment, open up new locations and purchase new supplies, driving the market in which Middleby operates. Efficiency improvements, restaurant renovations and conversions, and menu changes also fuel the need for additional cooking supplies.
The combination of Middleby and Blodgett will produce product synergies between the two companies. Middleby's conveyor ovens have a commanding market position at the high-end of the industry, dominating the over 36-inch ovens used by large chain high-volume pizza restaurants. With Blodgett's presence in the small oven market segment (under 36-inches), the company should also be a strong competitor in this segment serving independent restaurants and smaller chains. Middleby's new PS 536 small oven in fact was approved for use in Pizza Hut Express in 2001. Middleby also has acquired Blodgett's commanding market share and premium reputation in the oven segment. The Blodgett/Southbend combination has the potential to significantly grow market share through co-branding.
One of Middelby's historic strengths has been the company's successful ability to launch innovative products. Middleby's 500 series of conveyor ovens features enhanced performance over prior lines with patented technologies that reduce energy consumption by 30% and improve baking time. Blodgett also has recently introduced new products with enhanced efficiency, advanced features and increased performance.
International sales, which accounted for more than a quarter of Middleby's sales in 2000, offer an avenue for significant growth. The company's extensive international distribution network will serve as a springboard to expand markets for Blodgett products. Added to this, Dominos, one of the Middleby's largest customers, implemented aggressive expansion plans in Latin America in 2000 and expects to further increase its presence by entering the Brazilian market.
The company's top-notch customer base will also provide a solid platform for continued growth. Customers are enthusiastic about the potential for product expansions and innovations offered by a combined company. Production efficiencies, achieved through plant closures and headcount reductions, promise to keep prices competitive.
With twice the resources, Middleby looks forward to future opportunities as pizza continues to rank as one of America's most popular foods and the restaurant industry returns to higher levels of growth and profitability.
