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Let's make a deal: Food companies ripe for the picking

A bidding war for Jimmy Dean sausage maker Hillshire Brands resulted in a $7.75 billion purchase by Tyson Foods.

Spam producer Hormel is buying CytoSport, which makes Muscle Milk, for $450 million.

TreeHouse Foods, the company behind private-label sauces and soups and pickles, is buying Flagstone Foods, which provides private-label trail mix and dried fruit, for $860 million.

And that's just July's activity. Food deals are ramping up, and pros say there's a lot more action ahead.

Behind the activity is a shift in consumer tastes and trends, and a desire for companies to find growth.

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Food companies—mostly "middle of the grocery store" packaged food producers—are struggling to keep up with changing tastes and trends as consumers increasingly shop the perimeter of the grocery store for fresh fruits and vegetables and protein-rich dairy and meats.

Daniel Acker | Bloomberg | Getty Images

Shoppers are shying away from processed food, grains and carbohydrates, as well as food that is frozen, packaged, or laden with artificial sweeteners and flavoring. Instead, they are looking for labels that declare foods are natural, organic, gluten-free or GMO-free.

The upheaval is creating winners and losers in the industry. Among the winners are companies like Hain Celelstial and Boulder Brands. Those who are struggling include Kellogg and General Mills, as well as ConAgra and Campbell Soup.

Americans' changing tastes are happening against the backdrop of a tough economic recovery for consumer spending, as those with lower- and middle-incomes still struggle with jobs and stagnant income.

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Then you pair these business challenges with cheap borrowing conditions, growing confidence about the economy and cash-rich balance sheets, you've got a recipe for increased dealmaking.

So who's on the shopping list? Here are some of the names analysts and investors are talking about:

Annie's

Annie's shares have been hit hard lately, down 20 percent this year. While the maker of popular organic mac n' cheese, bunny crackers and other snacks posted sales growth of 19 percent last fiscal year, it disappointed Wall Street in May with a weak earnings forecast that reflected high inventory reduction costs, rising commodity prices and spending on developing new products and categories.

Despite the downbeat reaction and results, analysts say that Annie's is an attractive brand with products that appeal to the modern consumer. Further, the company would benefit from joining a bigger, more efficient food giantwith a streamlined manufacturing supply chainto leverage Annie's category-leading, healthy products.

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"That asset is a very easy plug-and-play for a conventional food company," said David Palmer, a food industry analyst at RBC Capital Markets.

"They charge a 25 percent premium to these high-margin categories, yet ... have the lowest margins of any food company in our coverage. Those margins could go up instantly under the management of a conventional food company. That's a billion dollar brand in the making that's right now only $200 million or so in sales."

Annie's declined comment. But CEO John Foraker addressed the issue during the company's earnings conference call on May 30 in response to a question from JPMorgan analyst Ken Goldman.

"There has been interest in the Annie's brand over the years and I assume there continues to be," Foraker said. "The way we think about it is: We, obviously as a public company, have a fiduciary responsibility to our shareholders to do the right thing to maximize shareholder value over time. So we will certainly focus on that."

White Wave

Another "good for you" company analysts point to is WhiteWave, the $5.4 billion enterprise behind Horizon Organic, Silk soy milk, and Land 'O Lakes half & half.

The company spun off from Dean Foods last spring, and later in the year bought Earthbound Farm for $600 million. Although it's doing its own deals, it's an attractive candidate for a takeover itself, analysts say, primarily because of the appeal of its brands.

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Morgan Stanley analysts led by Matthew Grainger upgraded WhiteWave's price target to $35 on Wednesday saying, "WhiteWave offers best-in-class organic growth targets driven by its concentrated portfolio of brands in high-growth food categories (plant-based beverages, coffee creamers, organic dairy)."

"We expect WWAV to leverage its innovation capabilities in new directions (soy yogurt, low-cal variants, new flavors) as well as ultimately consider bolt-on M&A, given its history of successful transactions."

WhiteWave declined to comment on deal speculation.

Buffett target?

Ever since Warren Buffett and PE firm 3G capital teamed up to buy Heinz in June 2013 and Buffett hinted at a sequel, speculation has been running high about which food company may be next.

A few recurring names that surface as likely candidates are Campbell Soup, Kellogg, and Mondelez.

While Kellogg is struggling with declining cereal consumption, which accounts for 30 percent of its sales, analysts say there's potential for this company to pivot, cut costs and spend its way to growth. That may require either Kellogg buying another company or selling itself.

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On the question of the next Berkshire/3G deal, ConsumerEdge Research analysts said, "Kellogg is a more probable candidate than Campbell Soup as it has a more attractive portfolio than Campbell, which is facing greater secular headwinds on its core soup category, and has more attractive international presence, via its global Pringles business."

"But an even more attractive candidate for Berkshire/3G could be Mondelez, given its attractive international footprint, attractive category growth and cost-cutting opportunities. "

Mondelez gets about 80 percent of its sales outside North America.

"It boils down to both Kellogg and Mondelez having solid international exposure, strong brands and operating margins well below other food companies," said Brian Yarbrough, an analyst at Edward Jones. "I see an opportunity for 3G to institute some of their operating principles that would take out excess costs and capacity, which should lead to much higher earnings power at both companies."

—By CNBC's Sara Eisen

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