Cashing IN

ConAgra's hostile offer for Ralcorp Holdings this year could be a sign of deals to come.

After a slow period during the recession, mergers, acquisitions and spin-offs are on the rebound in the food industry. Under pressure from shareholders who seek continuous equity growth, executives at many public companies with a surplus of cash on their balance sheets are seeking to deploy those resources through acquisitions.

"They are keen to put that money to work from a shareholder perspective," says Pat Dolan, national line of business leader at KPMG, a New York-based audit, tax and advisory services firm.

In particular, food leaders want to pick up high-growth assets, such as the private label business that Omaha, Neb.-based ConAgra finds attractive in St. Louis-based Ralcorp or, on the retail side, high-end fresh markets that are outpacing conventional grocery stores. Yet with higher costs driving food prices up and margins down, some retailers also are looking to unload lower-performing units that have been a drag on earnings.

More deals coming

Two-thirds of executives at food and beverage manufacturers said they intend to engage in more deals either as a buyer or seller in the next two years, in part because their companies have cash on hand, according to a recent survey by KPMG LLP.

About 40 percent said they intended to deploy excess cash for acquisitions this year, while the same percentage expect to do so in 2012.

The survey results are supported by data from Dealogic in New York, which reports an increase in M&A activity so far this year. Dealogic counts 512 mergers and acquisitions in global food manufacturing from Jan. 1 through Aug. 5, 2011, totaling $35.17 billion in deal value. And the upward trend suggests activity this year could surpass the 873 food manufacturing deals that took place in all of 2010 with a combined value of $44.62 billion. When compared with the 760 deals worth $55.53 billion in 2009, last year saw more activity but smaller deal sizes.

On the retail side, Dealogic reports 129 mergers and acquisitions in the global supermarket and grocery store sector from Jan. 1 to Aug. 5, 2011, representing $11.45 billion in value, compared with 190 deals and $12.07 billion in total deal value in all of 2010. The deal volume in 2010 represented about a 60 percent increase from $7.57 billion in 2009, while the number of deals was even with the prior year, Dealogic reports.

Executives responding to the KPMG survey expected M&A activity to pick up despite the sluggish economy, which many say won't experience a complete turnaround for years. According to the survey, 30 percent of executives expect a full recovery by the end of 2012, while 35 percent say it will occur in 2013 and 32 percent say it will be 2014.

Signs of the times

A difficult economy presents different reasons for mergers and acquisitions than a boom period. "Food inflation has crept back in. Volatility has been extraordinary," says Paul Mariani, director of investment banking at Variant Capital Advisors, a Birmingham, Mich.-based affiliate of Conway MacKenzie Inc.

Yet shareholders' appetite for growth is spurring companies to look for new opportunities through acquisitions. "At the end of the day, shareholders require creative thinking and acceptable returns," Mariani says. "We hold executives' feet to the fire on creating equity value over the long term," and mergers and acquisitions can be an expeditious way to accomplish that.

Kraft Inc.'s strategy of using a reverse Morris trust to split itself into two units eliminates the tax bill that would be incurred during a sale.

– Frank Maher,

KeyBanc Capital Markets

But they don't always turn out exactly as planned. Two years after its acquisition of Cadbury Plc. for $22.4 billion, Kraft Inc. surprised some with its decision to split the company into two separate units. Kraft's strategy of using a reverse Morris trust for the transaction is one that others are likely to consider because it eliminates the tax bill that would be incurred during a sale, says Frank Maher, managing director of Cleveland-based KeyBanc Capital Markets' food and beverage practice. Cincinnati-based Procter & Gamble is using the trust in its $235 billion split-off transaction of its Pringles unit to Diamond Foods, Maher says.

Growth strategies

More commonly, however, large food companies want to gobble up smaller ones as a growth strategy. In fact, experts say Kraft's acquisition of Cadbury was motivated partly by anemic growth in its legacy businesses, but creating synergies between the fast-growing snack business and the company's slower-growth traditional lines proved challenging.

ConAgra wants Ralcorp for its $3 billion in annual private label sales and has made three hostile offers for the company so far this year, including one in August for $94 a share. Ralcorp's board has summarily rejected the offers, asserting that the company can do better on its own. While Ralcorp has attempted to find a buyer for its Post branded cereal business, it plans to continue growing its private label operations. To that end, in August it announced its own acquisition of Sara Lee Corp.'s North American refrigerated dough business for $545 million, which will add pizza and toaster pastries to Ralcorp's private label business.

Selling strategies

Ralcorp isn't the only company that has been reluctant to sell. With valuations low due to the economic downturn, many middle-market companies have postponed putting themselves on the block.

"There are a huge number of closely held businesses that will come to the market in the next five years."

– Josh Benn,

Duff & Phelps

But experts say that sentiment might be changing. Middle-market retailers in particular might be itching to sell now rather than investing more of their own capital to keep a unit going. Unless they have carved a niche, investing in organic growth could be slow going in the current environment, says Josh Benn, head of retailing and consumer and restaurant banking at Duff & Phelps in New York. If a company survived the downturn, owners might be worried about the possibility of a double-dip recession and decide to sell now while the market is somewhat improved, Benn says.

While sellers might not get top dollar for their businesses today, they probably won't be unloading at the bottom, either. Some distressed retailers have found themselves in a tough spot when they were forced to sink more funds into a location that wasn't profitable, says Juanita Schwartzkopf, managing director of Focus Management Group in Portland, Ore., which offers financial advisory and consulting services.

If a retailer can't sell a money-losing location, it might be better off shuttering it altogether to improve the company's overall financial picture.

– Juanita Schwartzkopf,

Focus Management Group

If a retailer can't sell a money-losing location, it might be better off shuttering it altogether to improve the company's overall financial picture, she says. Some retailers have opted to file for bankruptcy to get out of leases they signed during a boom real estate market that they can no longer afford, she says.

Given that background, those owners that do opt to sell all or part of their companies are more likely to agree to price them realistically for the market. Until recently, "sellers of these entities have had some pretty high expectations from the realization of price points, but that has now started to come down," Dolan says. Many companies are looking at their portfolios of businesses and realizing some just don't fit. By putting non-core businesses on the block, companies can turn their attention to strengthening their primary operations, he says.

But finding a buyer is another matter. Willis Stein & Partners, the Chicago private equity firm that has owned Roundy's Supermarkets since 2002, has tried to sell the grocery retailer without success, says Benn of Duff & Phelps. "They didn't get the price they were looking for," he says.

Willis Stein reportedly paid $800 million for the Milwaukee-based retailer, which owns Pick ‘n Save, and hoped to fetch $2 billion for it in 2007 before the stock market tanked. This year the firm reportedly hired investment bankers Moelis & Co. and Credit Suisse to conduct an auction that it hopes will bring at least $1.2 billion for the chain of 154 stores.

Global food manufacturing M&A
2011 YTD 512 deals totaling $35.17 billion*
2010873 deals totaling $44.62 billion
2009 760 deals totaling $55.53 billion

Global supermarket M&A
2011 YTD 129 deals totaling $11.45 billion*
2010 190 deals totaling $12.07 billion
2009 190 deals totaling $7.57 billion

*Jan. 1-Aug. 5, 2011
Source: Dealogic

Baby Boomers sell out

The economy aside, another economic indicator that dealmakers watch is the graying of Baby Boomer business owners, who don't always have a succession plan in place. "There are a huge number of closely held businesses that will come to the market in the next five years. It's something all executives should be thinking about," Benn says.

Beaverton Foods in Hillsborough, Ore., for example, acquired Pacific Farms in January for an undisclosed price after it learned the owner of the wasabi producer it regularly purchased from planned to retire. Beaverton Foods, which makes shelf-stable horseradish and specialty mustard, uses the wasabi as an ingredient for its products but didn't want to start growing the exotic item from scratch, says Domonic Biggi, executive vice president.

"I've got a low threshold for pain. How many years do I want to [spend to] develop a marketplace?" Biggi says. "You save a lot of time and energy and all the mistakes" by acquiring an existing business, he adds. Biggi expects to recoup his investment in the next six months.

Still, when faced with an unwilling candidate, expect the price of an acquisition to go up as it has in the ConAgra-Ralcorp dance. If a deal is accretive, it likely will work out over time, Mariani says.

"The risk becomes execution," he says.

Freelance journalist Ann Meyer is editor of and chief executive of L3C Chicago, L3C. Meyer formerly was a freelance small business columnist for the Chicago Tribune and has written for a variety of business publications, including BusinessWeekSmallBiz, Crain's Chicago Business, Specialty Coffee Retailer, Multichannel Merchant and Prepared Foods.