By Maureen Flanagan
Euro-Caribe Inc., a small, profitable Puerto Rican producer of sausages, had grown until production at its San Juan factory was bursting at the seams. Only three miles down the road was Federal Packing Company, a much larger and equally successful producer of cooked ham products, owned by the Cadenas family since 1967. In early November 1998, Euro-Caribe acquired Federal in an $18 million transaction financed by American Capital Strategies (NASDAQ Symbol: ACAS), a buyout and specialty finance company based in Bethesda, MD. The new company, under the name Euro-Caribe Packing Company, will be the largest independent producer of processed pork products in Puerto Rico.
"With the acquisition of Federal, we have a recipe for success," said Jose Casanova, Euro-Caribe's President. Casanova anticipates significant production and marketing synergies to result from combining the two companies. The transaction was Euro-Caribe's first significant acquisition since Casanova and Wolfgang Kell, Chief Production Officer, started the company in 1974.
With respected premium brands, both companies have flourished in their respective markets for years. Euro-Caribe claims more than 60% of the local sausage market. More than half of its production is fresh sausages made of pork, chicken, turkey or a combination of pork and chicken. The rest is cooked or smoked sausage, including chorizo sausages for pizza topping, mortadella, Polish sausage, and blood sausage. The company's 15,000 square foot plant -- listed by the U.S. Department of Agriculture as one of the best meat processing plants in Puerto Rico -- produces almost 1,000 tons of sausages a year and is quickly reaching full operating capacity. Euro-Caribe sells under its "Congusto" brand name to supermarkets and restaurants throughout Puerto Rico and exports 7% to several U.S. distributors that sell in Latin American markets in New York and Miami.
Federal is a family-owned ham business formed by Gabriel Cadenas and, until the acquisition, run by his son Gerardo. About 95% of Federal's production is cooked ham and pork loin, made Puerto Rican style with peppers and spices and often used in traditional Puerto Rican cooking. Federal sells its products under the "El Serranito" brand name to major retail chains and many smaller supermarkets. The company also produces canned luncheon meat and, with another local firm, has won a contract to provide the Puerto Rican school system with lunchmeat for the last few years. It operates out of two buildings totaling 39,000 square feet, with a meat processing capacity of 6,000 tons per year. It currently operates at about 50% of capacity.
American Capital Principal Ginger Rollins, referring to the relative size of the two companies, noted, "This acquisition is a story about a small business that is now able to take a huge step forward, with new opportunities to expand and to realize its dreams for the future." In financing the acquisition, American Capital provided an $18 million credit facility that included a bridge senior debt and subordinated debt with warrants, in addition to a revolving line of credit. American Capital will also hold a portion of the equity, as will San Juan Holdings, the Puerto Rico-based investment banking firm that sponsored the transaction.
This transaction marks American Capital's first investment in Puerto Rico and its first in the pork products industry. In addition to Euro-Caribe, American Capital has financed other small and middle-market businesses that need capital for acquisitions or expansion. It also specializes in ESOP and management buyouts.
Euro-Caribe believes that "American Capital will be a great partner for us as we accelerate our growth," according to Casanova. The two pork companies, each profitable in its own right and with virtually no overlap in their product lines, stand to gain significant synergies by joining forces. One such synergy is consolidating the cooked products into the large underutilized Federal facility and keeping the fresh products in the Euro-Caribe facility. This division is particularly important because of the increasingly stringent health regulations that require the separation of fresh and cooked meats. In addition, Euro-Caribe can utilize the entire line of its pork products more efficiently. The combination will also reduce overhead, improve merchandising, increase volume, and allow consolidation of deliveries and administrative operations.
Euro-Caribe also plans to capitalize on the popular "El Serranito" brand by introducing new products under the label and improving merchandising of products currently on the market. In addition to supermarket chain stores and distributors, Euro-Caribe will sell to pizza restaurant chains, such as Domino's Pizza, and other institutions. It will also continue to export products to the U.S. and to bid for the contract to provide meats for the Puerto Rican school lunch program.
"We're very excited about the opportunity to expand our business," said Casanova. "This is a big move forward for our company, our employees, and our customers. There is no doubt that combining the two companies will take a lot of hard work, but in the end we are sure it will be worth it."
