News Column

Deal speculation intensifies in food business

June 7, 2014

By Mike Hughlett, Star Tribune (Minneapolis)



June 07--The bidding war for Hillshire Brands that revved up last week has put a spotlight on growing buyout sentiment in the food industry.

Deals are up this year, and so are a lot of food stocks on speculation of who might be next in the cross hairs.

"I wouldn't be surprised to see more transactions," said Jack Russo, a stock analyst at Edward Jones. "Companies are sitting on a lot of cash, and interest rates [for borrowing] are very low."

Still, Minnesota's two big publicly traded packaged food companies, Golden Valley-based General Mills and Austin-based Hormel Foods, are less likely to be acquirees than acquirers, analysts say.

Hormel could be an attractive target for the same meat companies bidding on Hillshire, but it has an ownership structure that would complicate any acquisition. Hormel is 49 percent owned by the Hormel Foundation, which is dedicated to supporting charitable, education and scientific endeavors in and around Austin.

"That probably keeps them off the market," said Brian Yarbrough, an analyst at Edward Jones. "I think [a buyout] would be difficult when the foundation has that large of a stake -- unless it's at some astronomical price."

Meanwhile, General Mills' market capitalization of $34 billion is quite large for a packaged food company, making any play for it a megadeal.

While that's certainly possible, Mills does not have the low-hanging cost-cutting opportunities that some potential buyers would covet, said Erin Lash, a stock analyst at Morningstar. "General Mills is already run efficiently."

General Mills and Hormel declined to comment for this story.

The food deal parade already touched Minnesota this year when cereal maker Post announced in April it would buy Minnetonka-based egg producer Michael Foods for $2.45 billion. A sale of Michael Foods, which specializes in liquefied eggs, had been rumored for months as its private equity owners were looking to exit.

Speculation has also brewed for months that Chicago-based Hillshire Brands was a takeover candidate. But the maker of Hillshire Farm lunch meats, Ball Park franks and Jimmy Dean breakfast products surprised Wall Street by first becoming a potential buyer, not seller.

On May 12, Hillshire made a $6.6 billion bid for Pinnacle Foods, maker of Birds Eye frozen foods, Vlasic pickles and Log Cabin syrup. But Hillshire's diversification play is in limbo now that Tyson Foods and Pilgrims's Pride have made multibillion-dollar offers for Hillshire itself. Pilgrim's Pride is on top now with a $7.7 billion bid last week.

While Tyson and Pilgrim's Pride have their own retail brands, they also have large integrated meat operations -- think slaughterhouses. Stocks of integrated meat companies are volatile, as investors see them more as commodity producers. Hillshire eschews the commodity end of the business, instead focusing on higher-margin branded meat products.

Hormel, while it has some commodity meat operations, is more of a branded food purveyor like Hillshire. And Hormel's stock acts like that of a packaged food company, rising steadily in recent years.

So theoretically, "whoever doesn't get Hillshire might be interested in Hormel," Yarbrough said. But then there's the Hormel Foundation issue. Plus, Hormel has a bigger market capitalization -- $13 billion -- than Hillshire, meaning it would be more costly for a buyer.

While meat has its specific issues, the entire packaged food business is suffering from a malaise that could lead to more buyouts. Sales volume growth has been anemic for U.S. food makers, including General Mills. It's a trend that could lead to more cost-cutting and deal making, according to a report by Alexia Howard, analyst at Bernstein Research.

In other words, if a company can't grow fast enough organically, it can buy growth. "Some of these food companies know they will have to go out and buy companies and look for synergies and costs to take out," said Edward Jones' Yarbrough.

And it may not be just food companies doing the buying. The big food deal of the past year was the $27 billion purchase of Pittsburgh-based Heinz by private equity firm 3G Capital and Warren Buffett'sBerkshire Hathaway.

Cost cutting has been paramount on 3G's agenda. Since August, Heinz has announced nearly 2,000 layoffs and the closing of three plants.

"There still is a lot of chatter over whether another packaged food company could be targeted for a deal like Heinz," said Morningstar's Lash. Kellogg and Campbell Soup have been mentioned as the most likely possibilities, she said, General Mills less so.

"It's not out of the realm of possibility [to see a Heinz-like deal], but it's hard to make that call," Lash said.

Mike Hughlett -- 612-673-7003

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Source: Star Tribune (Minneapolis, MN)