Big Food manufacturers, struggling with slowing demand and rapidly changing consumer tastes, will make acquisitions a major part of their business plans in 2018 as they jump-start growth and give their companies a bigger stake in popular trends.
Many executives attending the annual Consumer Analyst Group of New York conference in Florida this week said they're noncommittal as to the size of a deal, so long as they don't overpay and whatever they buy generates enough cost savings and revenue growth to justify the purchase price.
"This is a big part of our strategy and will continue to be," Sean Connolly, CEO of Conagra brands, told analysts. "M&A provides upside. When it comes to acquisitions, the key, of course, is [finding] that proper balance between being aggressive and being disciplined."
The desire to consolidate follows an active 2017 when Tyson Foods, Campbell Soup and McCormick & Co. each pulled off deals topping more than $4 billion dollars — with the transactions allowing the companies to expand their reach in organic, convenience, snacking or trendy new flavors. As consumers shun full meals and processed items in favor of snacks and fresh products, Big Food has struggled to grow, making an acquisition an increasingly attractive option to quickly get in lockstep with these trends.
Jeff Harmening, CEO of General Mills, said the cereal maker's efforts to reshape the company's portfolio will accelerate going forward, with acquisitions expected to play a meaningful role. The Minnesota company on Friday followed through on that pledge by purchasing natural pet food maker Blue Buffalo Pet Products for $8 billion, it's first foray into the space in decades and Harmening's biggest deal since he took over in June.
"We're going to continue to look for bolt-on acquisitions both in North America and Europe," Harmening said during a panel discussion. "We feel good about what we've done with Annie's and what we've done with Epic, what we've done with Larabar."
In the case of Annie's, which General Mills acquired in 2014 for $820 million, Harmening said his company has grown Annie's distribution by an estimated 80% and household penetration by 40% since it was purchased. The manufacturer of Nature Valley granola bars, Old El Paso taco shells and Yoplait yogurt is hopeful it could reach similar success with future purchases.
Active M&A in 2017
In December, Campbell Soup, which recently closed its purchase of organic products maker Pacific Foods, acquired snack maker Snyder's Lance for nearly $5 billion — the largest deal in its 149-year old history. That same day, Hershey announced its biggest-ever purchase of Amplify Snack Brands, parent company of SkinnyPop, for $1.6 billion. Countless other smaller deals, like Conagra's $250 million purchase of Angie’s Boomchickapop and Kellogg's addition of Chicago Bar Company, which makes the popular clean-label RXBAR, for $600 million, also transpired.
"Not for a while"
For some companies that were active in M&A in 2017, a few executives said they are taking time to digest and integrate their deals, while paying down debt they took on to fund the acquisition.
Denise Morrison, Campbell Soups' CEO, told Food Dive she will watch for potential targets, but is unlikely to make another deal anytime soon.
"Probably not for a while," Morrison said. "We will still keep our eye on the pipeline but we're going to focus for the immediate future on execution and making sure we integrate (Snyders-Lance)."
But Hershey, which remains interested in companies with strong revenue growth in the U.S. snacking business, said its ideal purchase would be a business similar in size and profitability to Amplify. "If an acquisition adds strength to our U.S. offerings, and allows Hershey to increase consumer snacking occasions, we're definitely interested," Patricia Little, Hershey's CFO, said at CAGNY.
Erin Lash, a director of consumer equity research at Morningstar, told Food Dive she expected more mergers in 2018 as large food companies are flush with cash and looking to grow.
"We think that consolidation in the space will likely persist. Firms that have ... been plagued by tumbling growth are likely to look to extend further into faster-growing categories or segments, whether that be snacking, natural or organics, or maybe extending their geographic footprint," Lash said.
The most likely scenario is that companies grow through smaller bolt-on acquisitions, though a larger, transformational deal is certainly possible, she noted.
"Even when deals aren't meaningful in terms of their contribution to the total sales portfolio, the opportunities can be far more reaching in the ability to help established firms grease the wheels of their innovation cycle, which is one of the things we've heard a lot of companies acknowledge that they've been plagued by," said Lash.
It's uncertain which U.S. food company will be the first to act in 2018 with a meaningful deal, but many believe it's only a matter of time before Kraft Heinz — rebuffed early last year following a $143 billion takeover bid for Unilever — decides to make its first major acquisition since Kraft and Heinz combined three years ago. The pressure may have intensified after the maker of Oscar Meyer hotdogs, Lunchables and Grey Poupon announced last week that sales fell for the seventh straight quarter — helping to push its stock to a two-year low.
"We see limited fundamental downside and attractive risk-reward given (Kraft Heinz's) advantaged role in industry consolidation," Morgan Stanley analysts said in a note after the earnings announcement.
Another factor that could spur deals is the recent tax cut law, which has boosted cash supplies for many companies in the food space with significant U.S. operations. A report from Bank of America Merrill Lynch said last month that U.S. companies as a whole could see a record number of mergers and acquisitions in 2018 as they are more likely to use the money they save for deals rather than capital expenditures.
Tom Hayes, CEO of Tyson Foods, told Food Dive the company's tax rate fell from 34% to 24%, saving his firm about $300 million. The money, he said, could go to deals, but for now is being given to employees in the form of bonuses and invested back into the business through capital projects.
While the meat processing giant would like to reduce its debt following the AdvancePierre purchase last year, if a great deal that could improve Tyson Foods arises, the company wouldn't hesitate to act, Hayes said. One potential obstacle toward a major deal could be valuations, the executive said, with bigger companies tending to seek higher multiples the larger they are — making smaller bolt-on purchases more financially attractive.
Still, he said, regardless of the deal: "If we can see excellent synergies come out of it, whether it's revenue synergies or cost synergies, we'll certainly do it."