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Oaktree Capital Says It Made 23 Times Investment on Sell of Company

- By Holly LaFon

Oaktree Capital Management, which specializes in alternative investments, detailed its return on a food producer more typical of a tech company in a conference call Wednesday - the culmination of a nine-year turnaround.

The firm, founded by veteran investor Howard Marks (Trades, Portfolio), will sell its 43% stake in AdvancePierre Foods (APFH) as part of an announcement Tuesday that the company it would be acquired by Tyson Foods (TSN) for $40.25 a share, or $4.2 billion. The buyout gave Oaktree a return around 23 times the capital it originally put up, a fact touted in its first quarter earnings call.


"This is clearly one of the all-time great private equity investments and certainly a standout in the history of Oaktree," Bruce Karsh, co-chairman and chief investment officer of Oaktree, said. "It is important to point out that this is not a high tech company, but a prosaic food producer and distributor."

With $100.3 billion in assets under management, Oaktree invests primarily in corporate and distressed debt, real estate and listed equities globally. The AdvancePierre play originated in its control-investing strategies Special Situations fund, which has $5.07 billion in assets under management. In addition to AdvancePierre, Oaktree has claimed control positions in 23 other companies in distress, such as EXCO Resources (XCO), Quicksilver and Snyder's-Lance (LNCE).

Oaktree acquired AdvancePierre in 2008 through bankruptcy, paying $170 million for the whole company. Just Pierre Foods at the time, it was facing several quarters of losses and default on its credit due to rising raw material prices. Pierre Foods emerged from bankruptcy in December 2008 after restructuring, with Oaktree as owner sponsor.

Oaktree soon merged Pierre Foods with Advance Food Company and Advance Brands in 2010 to create "a leading supplier of value-added protein and handheld convenience food products to the foodservice, school, retail, club, vending and convenience store channels."

"Both Pierre and the Advance companies are coming off of successful years," Matthew Wilson, managing director at Oaktree Capital Management, said in a statement. "We are very excited about the growth opportunity created by putting these three financially strong companies together."

The firm led it through a string of acquisitions in the following years. AdvancePierre bought the wholesale and manufacturing operations of Landshire Inc. in January 2015, Better Bakery manufacturing assets in February 2015, and Allied Specialty Foods for $60 million in 2016.

Reportedly, Oaktree had shopped the company to potential buyers for several years with no success. In 2016, it took AdvancePierre public at a price of $21 per share. From the date of the IPO through Monday of this week, its stock had risen 51.6%.

For 2016, AdvancePierre posted a revenue decline to $1.57 billion from $1.61 billion the previous year. Earnings increased to $136.3 million, or $1.90 EPS, from $37.1 million, or 56 cents EPS the previous year. For 2017, it had predicted higher sales in a range of $1.64 billion to $1.67 billion and lower EPS between $1.30 and $1.37 per share.

AdvancePierre's contribution will be marginal for Tyson, the food behemoth with $22.9 billion market cap, which had sales of $36.88 billion for 2016, a decline from $41.37 billion a year prior, and net income of $392 million, down from $259 million the previous year.

Tyson also assumed $1.1 billion in AdvancePierre's debt as part of the price. Paying for the company will raise Tyson's net debt to EBITDA - a measure it uses to help investors determine operating performance via its ability to service its debt with earnings - from 1.7 times to 2.7 times. It plans to pay off the debt with cash flows and sales of other assets.

Oaktree (OAK)'s stock price slipped 1.2% Tuesday, the day it announced the sale, and ended the week down around 0.11%. Tyson Foods' share price declined 1.97% after an initial jump Tuesday, set to close the week down around 1.35%.
This article first appeared on GuruFocus.