Middleby’s Shareholders Have Lost Their Marbles

by Will Ashworth | June 28, 2013 9:32 am

According to executive compensation consultant Semler Brossy, a total of 43 companies — or 2.3% of the Russell 3000 — have received less than 50% support on their “say-on-pay” votes[1] through June 26. A majority of the companies getting shot down by shareholders have annual revenues of less than $2.5 billion.

One of those firms is Middleby Corp. (MIDD[2]), an Illinois manufacturer of food processing equipment including the Viking Range brand. Middleby’s stock has achieved a 10-year annual total return of 37.5% through June 26. By comparison, iShares’ Russell 3000 ETF (IWV[3]) achieved an annual total return of 6.9% during the same 10-year period — a gaping differential.

It’s incomprehensible that shareholders wouldn’t support CEO Selim Bassoul’s compensation package considering the job he has done as chief executive over the last 12 years. I’m fine with say-on-pay votes as long as they remain non-binding. Middleby’s situation is a classic case of what can go wrong when you let shareholders do the board’s job.

Selim Bassoul’s compensation, while high, is not out of line given the performance of the company — both in financial terms and the performance of its stock. The business is well-run, and at age 56, Bassoul should have at least five years left at the helm to continue that success. With so many more egregious examples of excessive executive compensation out there, it appears Middleby’s shareholders have forgotten how to be grateful.

Let’s take a look at why shareholders are upset and why their opinion is wrong — in a big way.

Bassoul’s problems started in 2011 when the CEO received an $18 million stock award as part of his $28 million in total compensation for that year. Corporate governance expert Lev Janashvili of GMI Ratings in New York termed the pay “off the charts” while Equilar says $4 million is more the standard for a company of Middleby’s size.

And that’s where the compensation experts fail miserably. Middleby isn’t your standard, mediocre company. It’s an earnings and revenue machine. The company rightly points out that 90% of Bassoul’s compensation is performance-based, focusing on its growth of earnings and EBITDA.

Joe Cahill’s article in Crain’s Chicago Business[4] does a good job explaining how Middleby’s acquisition binge over the years has enabled the company to achieve above-average growth at the cost of saddling it with significant debt and goodwill — both potential torpedoes to a company’s future survival. Many acquisitions never deliver the anticipated synergies and forecast growth, making Cahill’s concerns valid ones.

But there’s another side of that coin.

When done well, acquisitions can transform a company because a body in motion tends to stay in motion. It’s not easy integrating acquisitions, but Middleby seems to be good at it. Since 2009, it has completed a total of 19 acquisitions — the $380 million purchase of Viking Range at the end of 2012 being its biggest in its history. Every one of its acquisitions has been accretive to earnings from day one and has added $620 million to the company’s top line since 2009. Chasing down acquisitions is time-consuming, so you need smart people doing the hunting. And shareholders seem to have forgotten that smart people don’t come cheap.

There are five ways a company can allocate capital: invest in the business, acquire businesses, repay debt, repurchase shares or issue dividends.

Middleby primarily uses the first three, leaning heavily on acquisitions. Since 2008, it has spent $988 million acquiring businesses that have more than doubled its revenue. Where shareholders are rightly concerned is that operating cash flow has only increased by 54% in the same period.

But what they haven’t taken into account is that acquisitions can take up to three years for the net benefits to fully reveal themselves. The company is barely six months into owning Viking, which is possibly the most transformational acquisition it has ever made, because it strengthens Middleby’s position in the residential cooking market. It’s way too early to assess the success or failure of the deal.

During the past five years, Middleby has carried an average total debt of $260 million. At the end of March, it had $638 million as a result of buying Viking. It’s going to take time getting the range maker restructured and growing again, but if anyone can do it, Middleby can.

In February, the company cut 20% of its employees to bring its cost structure in line with a slow housing market. Back then, Viking’s revenues were about double the $200 million they’ve been stuck at since the housing collapse. Bassoul sees Viking as a billion-dollar business. Shareholders should be careful to bet against the hand that feeds.

Since Bassoul became CEO on Jan. 1, 2001, Middleby’s stock has achieved an annual total return of 39.7%. If you put $10,000 into Middleby back then, it would now be worth $653,000. Bassoul’s total compensation over the past 12 years is $128 million, or $10.7 million per year. Middleby’s board essentially paid Bassoul $270,000 for every 1% of annualized return. For comparison, in 2012, General Electric (GE[5]) paid Jeff Immelt $976,000 for every 1% of annualized return, and last year was a good one for the appliance conglomerate. Go back a few years, and Immelt’s number balloons well more than a million dollars per 1% annualized return.

If Middleby shareholders need an example of corporate greed, they should have a look at John Hammergren’s compensation[6] as CEO of McKesson Corp. (MCK[7]).

That’s definitely worth voting against.

If you’re a Middleby shareholder and you voted “no” to Bassoul’s compensation plan … give your head a shake. You won’t find many CEOs producing this kind of return for shareholders over such a long period of time. You just won’t.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/06/middlebys-shareholders-have-lost-their-marbles/

---