What On Earth Is Happening In The Food Sector?

Acquisition activity in the mainstream area.

By Adam Ismail

As most people have noticed, there is a lot of consolidation occurring in the food portion of the industry. Food giants like Kellogg’s, Kraft and Heinz have been taking significant stakes in natural and functional food companies, in addition to other industry insider transactions like the Odwalla-Fresh Samantha acquisition. The large companies have had de­pressed stock prices for the past year, in which the normal market has grown 15%. In fact, many analysts have said the food sector in general is not a good investment. These companies needed to look for related areas of higher growth. The obvious choice was our industry. The whole supplement market ran scared when AHP bought Solgar, but that really pales in comparison to these transactions:

• Kraft acquires Balance Bar and Boca Burger
• General Mills acquires Small Planet Foods
• HJ Heinz buys a 20% stake in Hain
• Kellogg acquires Worthington Foods
• Group Danone takes a 20% stake in Lifeway Foods.

In a relatively short time period, these players have come out in force looking for the growth this industry has to offer. These manufacturers have bought into the companies at valuations averaging 3.1 times revenues. Before this recent trend, deals ranged from approximately 1.0 to 1.5 times sales. They also have been paying an average of 23 times the target’s’ earnings before interest and taxes (EBIT). Typically acquirers paid between seven and 10 times EBIT. What an incredible value in hindsight! Right? Well, not exactly.

The Real Value in These Deals

These multiples are incredible based on past performances, but some of the real value that General Mills will get out of Small Planet can come from dropping the products into existing manufacturing and distribution. You can almost bet that General Mills knows how to make food cheaper than Small Planet and that General Mills telling a retailer to carry its products will have more weight than Small Planet doing the same. Suddenly, the target will generate MUCH more cash than it ever could as an independent company, so a higher valuation is justified. For example, Hain Food Group reported record second quarter results in large part because product lines like its Westsoy grew 86% in grocery channels since the transaction.

In addition, through the organic and non-GMO products offered by these companies, the acquirers gain quick access to product lines that can be sold easily in European and Japanese markets, which are more proactive. Nobody knows the outcome of those issues in the U.S., but there is a clear consumer trend abroad that needs to be addressed. Even in America, retailers have begun clamoring for non-GMO SKU’s in anticipation of a change in preference. These issues have just created more reasons for the big guys to come in to acquire the mainstay companies that have shaped the industry.

What’s Next?

Nobody knows whether the acquisition spree by large companies is over or not, but certainly strategic alliances are the next area of focus in the space. Look for deals similar to the Heinz investment in Hain and the Danone investment in Lifeway. Other key areas sure to grab the attention of major food players are unique functional food technologies, which are perceived as high growth areas. Many analysts believe these acquisitions are just what the industry needed to truly become mainstream. A number of the smaller players could very easily benefit by a rapidly increasing market size brought on by the food giants. So pray that you can attract their attention

NW

Adam Ismail is a financial analyst with Health Business Partners (HBP),Warwick, RI) a boutique investment bank that works exclusively with companies in the natural products and complementary health services industries. HBP also provides capital to businesses in these industries as well as tracking financial data in the natural products industry and providing M&A and strategic advice, in addition to direct investments. HBP can be reached at 5784 Post Road, Warwick, RI 02818; 401-885-4670, Fax: 401-885-4686; E-mail: [email protected]; Website: www.healthbusiness.com.