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The Rationale for Consolidation among Packaged Food Firms

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Dec. 4 2020, Updated 10:53 a.m. ET

The synergies from restructuring activity

Consolidation activity in the packaged foods space has been high. There have been multiple transactions in 2014 and 2015. They have been spurred by differing rationale in a changing industry.

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One of the major causes for consolidation has been the higher synergies that come about with scale. The Kraft-Heinz (KHC) merger comes under this category. In July, Kraft and Heinz merged to form The Kraft Heinz Company (KHC). They formed the third-largest food and beverage company in North America after PepsiCo (PEP) and Nestlé (NSRGY). The deal was brought together by Warren Buffett’s Berkshire Hathaway (BRK-B) and Brazil’s 3G Capital. The combined Kraft Heinz Company is expected to generate synergies of $1.5 billion annually from 2017 onwards.

Besides, there will likely be sales upside. Kraft’s products will likely benefit from Heinz’s larger overseas network. While over 90% of Kraft’s sales stem from North America, Heinz derives ~60% of its turnover from outside North America.

Gearing towards growth portfolios

Earlier this month, General Mills (GIS) announced that it was selling its Green Giant and Le Sueur brands of frozen vegetables to B&G Foods (BGS) in a $765 million cash deal. The deal was valued at ~1.3x trailing sales.

The current trend of eating fresh and organic foods, particularly among millennials, puts the frozen foods business at a relative disadvantage compared to General Mills’ other businesses like Nature Valley, Yoplait, and Fiber One, among others.

At the same time, bigger packaged food firms have been on an acquisition spree to buy organic and natural food companies. Last year, General Mills acquired Annie’s for about $820 million or ~4x trailing sales.

The relatively higher multiple paid for Annie’s reflects the differential growth opportunities in the two food businesses. According to Jeff Harmening, General Mills executive vice president and COO in US retail, the organic and natural foods industry in the US grew at a CAGR (compound annual growth rate) of 12% over the past ten years. The transaction to buy Annie’s increased General Mills’ organic foods sales by over 60%.

Together, Mondelēz (MDLZ) and Berkshire Hathaway account for 2.80% of the holdings in the iShares S&P 100 ETF (OEF) and 1.80% in the SPDR S&P 500 ETF (SPY).

In the next part of this series, we’ll continue discussing Mondelēz’s options.

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