Food Merger Activity on the Rise

by: Rick Shea

Competitive activity remains intense, interest rates are ridiculously low and shoppers are more price sensitive than ever before. These factors will lead to further food industry consolidation in 2011. This is the second of a series of articles on potential merger or acquisition candidates for the supermarket industry.

In this part we will tackle the food retailers. This group includes household names like Kraft (KFT), Kelloggs (NYSE:K) and General Mills (NYSE:GIS) but also includes many privately owned or less name known names like Gilster, Diamond Foods (NASDAQ:DMND) and Flower Foods (NYSE:FLO). Recent acquisitions in the food manufacturing space include:

  • Kraft purchase of Cadbury
  • Ralcorp (RAH) buying AIPC in the private label pasta space.
  • Diamond Foods purchase of Kettle Foods. (potato chips)
  • Merger between snack producers Lance (NASDAQ:LNCE) and Snyders of Hanover
  • Treehouse purchase of Sturm Foods and now Specialty Foods.
  • Nestle‘s (OTCPK:NSRGY) integration of DiGiorno and Tombstone pizza brands
  • Unilever's (NYSE:UL) recent purchase of Alberto Culver.

In 2011 food companies will continue to look for complimentary products and brands that can drive strategic value for the parent company. Kraft's acquisition of Cadbury focused on the key Kraft strategy of driving increased international exposure with worldwide brands. Ralcorp’s acquisition of pasta maker AIPC was designed to give them more critical mass in private label and expand their presence into the fast growing private label pasta category. Diamond Foods continues to grow its snack portfolio, adding Kettle potato chips to its Emerald and Pop Secret snacks.

While we don’t expect any mega deals we would not rule out the Big 3 (Nestle, Pepsico (NYSE:PEP), Kraft) making further large buyouts .Of these companies only PepsiCo has been quiet lately. The list of possible candidates include General Mills, Kellogg, Campbell Soup (NYSE:CPB) and Smuckers (NYSE:SJM). PepsiCo would be most interested in synergies within the snack market with its Quaker and Frito Lay divisions. Diversification from the soft drink segment makes sense for PepsiCo and their Frito Lay snacks division has been a star performer.

More than likely we expect smaller buyouts driven by the need to create shareholder value. Here’s our list of top candidates:

  • Bread Industry: Sara Lee bakery division merger most likely with Hostess brands. Not much of a prediction here since Sara Lee has already announced their intention to sell their bakery business. Will they get any takers? Grupo Bimbo and Flowers are long shots because of union concerns.
  • Private Label: Expect Treehouse (NYSE:THS) to stay active. Private companies like Gilster Mary Lee, Karlin and other companies that operate in the center store make sense for Treehouse. Increased penetration in the sauces and dressings categories would also bolster their lineup. Ralcorp will take some time to digest AIPC and attempt to fix their cereal business so large purchases in 2011 are not likely.
  • Green Mountain (NASDAQ:GMCR): Starbucks (NASDAQ:SBUX) clearly wants in on $6 Billion plus supermarket coffee category. Green Mountains K-cup and single serve system with the Keurig Brewer would be a great platform for selling the Starbucks brand. Of course the price would be fairly steep under current conditions. You also cannot rule out Nestle, Smuckers, Kraft and Sara Lee—all have strong coffee businesses on a global or US basis.
  • Heinz (HNZ) and Campbell merger of equals: Heinz condiments and broths would be a natural compliment for the US.Both companies would benefit internationally from greater combined scale and size.
  • Continued division divestitures of non strategic brands and divisions. Kraft has several brands that don’t fit their long term strategy. General Mills Bakery group might make more sense combined with another bakery company.
  • Don’t forget international and emerging markets. Many US companies are looking to international markets as a way to drive sales growth.

All in all the food manufacturing industry is ripe for further consolidation. Financing costs are low and prices for most companies are at reasonable levels for the current environment. Sales will continue to play tough so future earnings will be driven by consolidation and cost savings. It should make for an interesting 2011 for the supermarket industry.

Disclosure: No positions