- Facebook Fiasco: 10 Things Underwriters Got Wrong
- Sticker Shock: What College Is Likely to Cost in 18 Years
- Citigroup Lost $20 Million on Facebook IPO Trades
- Many Greeks Moved Their Money Abroad Long Ago
- Still Like Facebook? There’s an ETF for That.
- Greek Exit Could Trigger 50% Fall in Euro Stocks: Analyst
- Main Players in the Greek Election
- Robber Breaks Into Taco Bell, Leaves Disappointed
- Greek Exit Could Trigger 50% Fall in Euro Stocks: Analyst
- A New Look at the ‘New Poor’
- Six Pack: Beer Buzz of the Week
- Greek Exit Could Trigger 50% Fall in Euro Stocks: Analyst
- Under Pressure, FHA Skews to Wealthier Home Buyers
- Big Stock Upside for Hudson City Deal: Analyst
- 5 High-Yield Stocks Ready to Boost Dividends
- Yoshikami: Four Things You Need to Know About Gold Now
- Steinbock: The Euro Zone Endgame Begins
- Option Bulls Take Another Shot on Idenix
MOST SHARED
- S&P Cuts Ratings on Five Spanish Banks
- Where Large Banks Fail, Regionals are Succeeding: Bove
- Marc Faber: 100% Chance of Global Recession
- The Shortage of Women Billionaires
- Greek Exit Could Trigger 50% Fall in Euro Stocks: Analyst
- Reum: Successfully Marketing Liquor through Facebook
- Facebook Analyst Reports All Over the Map
- Yoshikami: Four Things You Need to Know About Gold Now
- Under Pressure, FHA Skews to Wealthier Home Buyers
- Facebook IPO Fiasco: 10 Things Underwriters Got Wrong
MOST POPULAR
HOT ON FACEBOOK
Food Stocks May Be Poised For New Round of M&A
Text Size 
News Editor
 |
Warren Buffett, CEO & Chairman of Berkshire Hathaway, enjoying a Dairy Queen sundae. Dairy Queen is owned by Berkshire Hathaway. |
Last week, Kraft Foods shares went on a wild ride driven by market chatter that Buffett's Berkshire Hathaway was eying an investment in the food company. The maker of Oscar Mayer meats, DiGiornio pizza and Oreo cookies isn't the only food company at the center of such speculation. Pittsburgh ketchup maker H.J. Heinz was recently rumored to be in talks with a private equity buyer, but CEO Bill Johnson tried to dispel that talk in a recent interview on CNBC.
The recent wave of M&A and private equity has missed the larger packaged food manufacturers, but the sector remains on the radar screen of private equity players, who could be poised to begin a new round of deal-making. After all, the group has long been prized for its stable profile and reliable cash generation.
“Private equity has been making larger and larger deals,” said Steve Davis, head of the Food & Beverage Group at Barrington Associates, which provides merger and acquisition advice to companies with revenue between $25 million and $1 billion. “I think that will ultimately manifest itself with private equity making a play for a larger food company.”
U.S. Food Industry Merger & Acquisition Activity |
| Year | Number of U.S. Food Mergers & Acquisitions | Total Deal Values (in billions) |
| 2003 | 70 | $6.76 |
| 2004 | 83 | $8.22 |
| 2005 | 90 | $4.11 |
| 2006 | 120 | $16.40 |
| 2007 YTD | 52 | $11.91 |
* 2007 data through June 5, 2007.
Source: Barrington Associates
|
According to Davis, private equity has tended to favor food companies as a way to diversify other investments. The number of deals in the food industry, and their value, has been on the rise, but most of these transactions have been made in the middle market.
At the same time, investors also have begun to realize that some of the companies in the group are now armed with a substantial war chest that could be used to fund further consolidation in the industry. What companies will do with this growing pile of cash still remains to be seen.
Mergers among the top-tier food companies have been virtually non-existent over the past three to five years. That’s because a series of transactions, which included Kraft’s acquisition of Nabisco, Kellogg’s purchase of Keebler, and Unilever’s tie-up with Best Foods, had left the group busy paying down debt and integrating operations.
The track record for these deals has been mixed. Some of the deals, such as General Mills’ acquisition of Pillsbury, have had trouble delivering on the promised cost savings and benefits. And Wm. Wrigley Jr.’s recent experience buying the Lifesavers and Altoids brands from Kraft was a reminder that it is easy to get burned by an acquisition.
Touching Off The Next Wave
But acquisitions can be beneficial, and it just may be that the group is waiting for one company to boldly head back into the waters and touch off a new round of consolidation.
At moment, one of the most likely targets is Cadbury. The British company, which is expected to announce plans to separate its U.S. beverages business later this month, is restructuring its confectionery business. These activities could make the company easier to digest.
Kraft, for example, could purchase Cadbury at a premium and still have it be “significantly accretive,” according to Palmer. He estimates there is a 80% market overlap between Kraft and Cadbury, which should allow for substantial cost savings. The acquisition of Cadbury would expand Kraft's chocolate business and improve its international presence.
Palmer expects the next wave of consolidation in the food sector will play out over the next two to three years. He expects four or five large global players will emerge at the end of the period, most likely Nestle, Unilever, Kraft and PepsiCo. The others will become likely targets.
According to Sanford Bernstein analyst Alexia Howard, General Mills could fit the criteria of a private equity buyer because it stands to benefit the most from improved management focus and it is not in the middle of a restructuring program. (Kraft, Sara Lee, Heinz and Hershey are all in the midst of restructuring programs at the moment.)
Howard expects a private equity buyer would likely consider Campbell Soup and Kellogg to be running well, which would make it difficult to scale up revenue and profit from their current level.
Sector Values Easing
As for the possibility that an investor like Buffett might put a stake in the ground. Howard has been growing more positive about the group’s stock values, but still has a market weight rating on the sector.
The group enjoyed a big run-up in the first half of 2006, helped by a combination of macroeconomic factors and interest from activist investors such as Nelson Peltz. Although valuations remain lofty, they are not as sky-high as they once were.
 |
Keith Srakocic / AP Food stock values rose last year after activist investor Nelson Peltz showed interest in H.J. Heinz. |
Kraft may be one of the laggards. According to Palmer, Kraft is “modestly less expensive” than its peers.
“EPS expectations are quite low,” Howard said. She expects with dairy prices on the rise they will remain that way.
Still, Howard rates the stock and outperform because she expects the Northfield, Ill., company will see a pick-up in their sales in 2008. This run-up could push Kraft shares as high as $39 within the next 12 months, she said.
Howard and Palmer do not own shares of the stocks that they cover. However, UBS has an investment banking relationship with many companies in the sector, including Kraft, General Mills and Heinz. Sanford Bernstein owns more than 1% of the outstanding stock of General Mills, Hershey, Kellogg, Sara Lee, and Wrigley. The company also has performed non-investment banking services for many of the companies she covers.
Christina Cheddar Berk is a News Editor at CNBC.com. She can be reached at .
- The Nasdaq has suffered the most from the EU crisis showing there's risk in the usual tech stocks.
- Targeting more Millennials is just one of the items brewing for consumers in the world of spirits.
- It seems many people may need a reminder of how NOT to act on a plane. Here are a few tips.
- Here are some very unusual roadside stops along American highways that might peek your interest.
- How three generations of Americans are dealing with the finances of retirement.
Data is a real-time snapshot *Data is delayed at least 15 minutes
