The Secret to Merger and Acquisition Success In the Food Industry

Cost-driven synergies are hard to find and harder to execute. But in a health-conscious, technologically-driven economy, growing strong brands to make them stronger can work.  JL

Aaron Black reports in the Wall Street Journal:

Buying a fast-growing, innovative brand has worked when it plays to the buyer’s existing strengths. But blockbuster mergers designed to cut costs have been undermined by lack of growth. Cutting costs initially boosted margins, but lack of investment meant brands fell behind. Megadeals are falling out of favor and smaller acquisitions are increasing.
When breakfast cereal producers are buying hip pet food brands and candy companies are gobbling up popcorn makers, it’s a clear sign that growth is hard to come by in the food sector.

The lessons from these expensive efforts? Buying a fast-growing, innovative brand has worked when it plays to the buyer’s existing strengths. But blockbuster mergers designed to cut costs have been undermined by lack of growth.
The $54 billion Kraft-Heinz merger, completed in 2015, was the ultimate food deal. But after initial success, sales growth has slowed and the company’s shares are down by more than a third over the past year. The problem: cutting costs initially boosted margins, but lack of investment meant its brands fell behind in the hyper-competitive food industry.
Now megadeals are falling out of favor and smaller acquisitions are increasing. Last year there were a record 220 food deals targeting U.S. companies, according to Dealogic, though the total value only ranked sixth since 1995.
Recent examples of bolt-on acquisitions have included Danone’s $10.4 billion acquisition of organic milk producer WhiteWave Foods, Hershey’s $935 million deal for popcorn maker Amplify Snack Brands, and General Mills GIS 0.22% ’ $8 billion purchase of Blue Buffalo Pet Products.
Among earlier deals, General Mills’ acquisition of mac and cheese producer Annie’s scores as a success. One of the biggest failures was Campbell’s foray into fresh foods, which contributed to the downfall of former Chief Executive Denise Morrison, who stepped down last month.
Under Ms. Morrison’s leadership, Campbell acquired carrot and smoothie seller Bolthouse Farms in 2012 for $1.55 billion, and salsa and hummus maker Garden Fresh Gourmet in 2015 for $231 million. But the canned soup maker struggled to grow carrots, leading to quality problems and cost overruns. Bolthouse’s beverages also lost favor with consumers due to their high sugar content—a reminder that health fads can shift quickly. Campbell has since written down the value of its fresh foods division by $1.05 billion.
The company may have learned its lesson. Last year it bought organic soup maker Pacific Foods, offering obvious synergies. This year it bought snack business Snyder’s-Lance, which fits well with Campbell’s Pepperidge Farm brand. Now it is reviewing its entire portfolio.
General Mills did much better with Annie’s, which it acquired in 2014. The company boosted Annie’s presence from around 20% of U.S. grocery stores to 80% and extended the brand to soup and yogurt, doubling revenue, said Jeffrey Harmening, who became chief executive last year. That success silenced critics of the deal who said the $820 million price was too high at 27 times earnings before interest, taxes and depreciation.
At the time of the Annie’s deal, Mr. Harmening was chief operating officer of General Mills’ U.S. retail business. Now as CEO, he is attempting to repeat the Annie’s trick with premium pet food maker Blue Buffalo. Analysts have again criticized the high valuation.
“If everyone says, Jeff, you paid a high price, then I’d say yeah that’s right,” said Mr. Harmening, referring to the valuation of both Annie’s and Blue Buffalo. “Then some people want to say you paid too much. I’d say, well, you don’t know that. Time will be the judge of that.”
Analysts also have argued the potential distribution synergies are more limited with Blue Buffalo, which is mainly sold in pet stores and online.
Mr. Harmening is undeterred, and confident he can grow Blue Buffalo through supermarkets and traditional retailers. “So far I feel like I’m one for one,” he said. “And I think I’m about to go two for two with Blue Buffalo.”