Advertisement
07/01/2014

Growing through Acquisitions

Established retailers and CPG manufacturers are ramping up their acquisitions and opening up new formats as their confidence in the economy improves.

Companies are hoarding less cash and re-examining their allocation of capital, experts say. But the process is opening up a new debate around whether to build a new facility or new product or acquire a company with existing capabilities. "We can go, and we can spend a bunch of cap-ex to seed something organically and develop something on our own, or we can go and buy a business or an asset that might diversify our business. That internal dialogue around capital allocation is a vibrant discussion in these types of environments," says Joshua Benn, managing director at Duff & Phelps and head of the firm's corporate finance practice.

The new confidence comes amid U.S. Commerce Department data released in late April indicating new orders for nondefense capital goods rose 2.2 percent in March, after a 1.1 percent drop in February, while shipments of goods increased 1.0 percent on top of a 0.7 percent gain in February. The increases followed a 7.8 percent gain in core shipments in the fourth quarter of 2013, The Wall Street Journal reported.

But capital expenditures to expand production aren't a given, as experts caution many manufacturers still have sufficient capacity. Meanwhile, the slow economy is contributing to mergers and acquisitions among CPGs and retailers as companies strive for greater efficiencies. "You see there's a lot of portfolio pruning happening and portfolio rebalancing happening," particularly among midsize businesses, Benn says.

CPG CONSOLIDATION

Hillshire Brands hoped to change its profile with the announcement in May of an agreement to purchase Pinnacle Foods, which owns Birds Eye, Duncan Hines and Vlasic brands, for $6.6 billion including the assumption of Pinnacle Foods' outstanding debt, Hillshire Brands reported. Soon after, Pilgrim's Pride Corp. announced a bid to acquire Hillshire, and within the week, Tyson entered the fray. Tyson's offer, which as of press time appears to be the winning bid, is predicated upon Hillshire dropping its acquisition of Pinnacle.

"We believe our increased scale, combined with a more diversified portfolio, will deliver strong, consistent cash flows. This will enable us to continue to invest in our brands, enhance our portfolio, pursue value-accretive M&A and deliver significant long-term value to our shareholders," Connolly said.

On May 15, Hillshire completed the acquisition of Van's Natural Foods, which makes good-for-you frozen breakfast and snack foods, for $165 million, Dealogic reported. The company also bought Golden Island, a maker of gourmet jerky, for $35 million in September 2013.

By gaining scale, Hillshire could also gain clout with retailers. "You need to either get bigger or be acquired. We saw a period of this in the early 2000s when Pillsbury decided a $7 or $8 billion capitalization was not big enough to stand alone when all the retailers were consolidating, so they sold themselves to General Mills," Benn says.

Supermarket, Grocery & Food Manufacturer M&A Deals in North America Since January 2014
Announcement Date Completion Date Deal Value $ (m) Target Acquirer
January 17 April 14 61 Scotsburn (Fluid milk distribution network.) Saputo Inc.
February 3 150 PowerBar, Inc., Musashi Pty Ltd. Post Holdings Inc.
February 12 1,655 Canada Bread Co. Ltd. Grupo Bimbo SAB de CV
February 13 391 Sobeys Inc (29 stores) Overwaitea Food Group LP; Federated Co-operatives Ltd.
February 18 84 Quantum Foods LLC Raging Bull Acquistion Co. LLC
March 6 8,653 Safeway Inc. Albertsons LLC
March 10 April 3 340 Pineridge Group Aryzta AG
April 4 April 25 155 Specialty Brands of America Inc. B&G Foods Inc.
April 7 April 30 50 Blue Apron Stripes Group LLC; Bessemer Venture Partners - BVP; First Round Capital
April 17 2,500 Michael Foods Holding Inc. Post Holdings Inc.
April 21 154 Protenergy Natural Foods Corp TreeHouse Foods Inc.
April 21 165 Van's Natural Foods Hillshire Brands Co.
April 28 2,173 Susser Holdings Corp. Energy Transfer Partners LP
April 28 April 28 61 Rudi's Organic Bakery Hain Celestial Group Inc.
May 7 65 Roundy's Inc. (18 Rainbow Stores) SuperValu Inc.; Investor Group
Source: Dealogic

RETAIL FOLLOWS SUIT

On the retail side, experts predict mergers will continue. "There's just a glut of capital, and there's not a whole lot of growth. There's a whole evolution happening in food retail where you have a bunch of new operations entering the market, causing a lot of the legacy guys like a Safeway to need to sell themselves. And there's a lot of money to buy," Benn says. "The combination will continue to drive M&A in supermarket land."


"There's just a glut of capital, and there's not a whole lot of growth. There's a whole evolution happening in food retail where you have a bunch of new operations entering the market causing a lot of the legacy guys like a Safeway to need to sell themselves. And there's a lot of money to buy."

–JOSHUA BENN,

Duff & Phelps


While new entrants to the market, particularly in the farmers market and fresh market space, are adding excitement, they are turning up the pressure on the conventional mid-market players, such as Safeway and Albertsons. The two chains have been challenged to compete on price or quality, and experts suggest they didn't move quickly enough to make changes.

"It's like an aircraft carrier. Once some of these businesses start going the wrong way, you can't turn them around very quickly. It needs a complete overhaul in their operations," says Joe Dykstra, executive vice president at Westwood Financial Corp., which owns and operates 115 shopping centers throughout the nation. "The obvious trend is that there are fewer and fewer grocery stores that are a jack-of-all-trades. The niche players are the new stars of that business. The Trader Joe's, Sprouts and other folks that offer something specific and not just another Safeway store or Kroger store or Albertsons store," he says.


"The obvious trend is that there are fewer and fewer grocery stores that are a jack-of-all-trades. The niche players are the new stars of that business. The Trader Joe's, Sprouts and other folks that offer something specific and not just another Safeway store or Kroger store or Albertson store."

– JOE DYKSTRA,

Westwood Financial Corp.


FILLING THE GAPS

Retailers are seeking out spot acquisitions to fill gaps in talent, technology or market presence. Walmart executives, for example, said in a conference call last year the company would invest in new e-commerce fulfillment centers around the nation that cost $15 million to $90 million, depending on their level of automation. At that time, the company stated its goal of $13 billion in e-commerce sales in 2014, up from about $10 billion in 2013. "We're building best-in-class e-commerce. Only we can marry that with the assets of the world's largest retailer. E-commerce is clearly the right thing to do for our customers, and it's the right thing to do for our shareholders, because the largest opportunity in commerce is the intersection between physical and digital. And we believe that we can win that," Neil Ashe, president and CEO of Walmart global e-commerce said in the conference call.

The company has been investing both internally at its @Walmart Labs innovation center in Silicon Valley as well as through acquisitions of innovative technology companies. @Walmart Labs made its 12th acquisition in May with the purchase of Adchemy, which nets Walmart a team of engineers that are expected to improve the retailer's product search engine and classification systems, technology news site TechCrunch.com reported May 5. Walmart reported five additional technology acquisitions in 2013, including Torbit, a cloud-based website accelerator service; Inkiru, a provider of a predictive intelligence platform; OneOps, a cloud-based technology specializing in application design, transition and operations; and TastyLabs, where the retailer picked up key talent in customer experience in mobile.

IT'S TOUGH AT THE TOP

The Walgreen Co. also plans to expand its presence internationally through acquisitions. The Sunday Times reported May 18 the drugstore giant is considering purchasing the remaining 55 percent of Alliance Boots, the British pharmacy chain that The Walgreen Co. currently owns a 45 percent stake in, for 10.5 billion British pounds, or about $17.7 billion. In the process, the company also could move its headquarters from Deerfield, Ill., to Britain or Switzerland to reduce its tax bill, the story said. Boots operates about 3,000 stores in Europe, the Middle East and Asia and is headquartered in Nottingham, England, with its tax domicile in Switzerland, The U.K. newspaper reported.

In the U.S., Walgreens is reexamining its store network and intends to close 76 stores before August, while adding a net of 55 to 75 store locations in fiscal 2014. "We looked at several factors in deciding which stores to close. We address the impact of increased density from our own stores, the impact of real estate positioning within the market and material changes to a store's trade area," Wasson said, noting that the changes affect less than 1 percent of the company's more than 8,200 locations. "As we position for future growth, and markets and communities continue to change, we want to optimize our store footprint and make sure our stores remain on the best corners in America," Wasson said.

"Right now the conventionals are challenged. What that means is they will look for partners," says Bruce Cohen, senior partner at Kurt Salmon in San Francisco. Other major chains also have announced store closings due to slower growth. After reporting a 35 percent decline in profit to $90.9 million in the second quarter on a 6 percent drop in overall sales to $2.72 billion, Family Dollar in April said it would close 370 stores this fiscal year to achieve about $40 million to $45 million in expected annual operating profit improvement beginning in the third quarter of fiscal 2014. However, it expects to take a charge of $85 million to $95 million related to the store closings and affiliated job cuts. To boost traffic, it also announced plans to lower prices on about 1,000 items. Family Dollar announced "a strategic pause to a rapid rollout," Cohen says.

Family Dollar adjusted its new-store opening schedule to about 350 to 400 new locations in fiscal 2015, compared with 525 new stores in fiscal 2014. By closing underperforming stores and relying on insights to determine profitable new locations, it hopes to improve its return on investment.

SAFEWAY DEAL

Safeway, which has also been feeling the intense competition, agreed in March to be acquired by Cerberus Capital Management, the private equity firm that purchased Supervalu's Albertsons banners last year, in a deal valued at $9.4 billion. The Safeway-Albertsons combination creates a supermarket retailer with more than 2,400 stores nationwide, 27 distribution facilities and 20 manufacturing plants with more than 250,000 workers. The companies expect the consolidation to result in cost savings that can be passed on to consumers, while also driving enhanced distribution capabilities that are expected to result in fresher produce, dairy and meats.

For Safeway, the merger presents an opportunity to better compete with other formats that have entered the markets it serves, including Trader Joe's, Aldi, Walmart and Whole Foods, Cohen says. But it wasn't a sign of strength for the conventional player. "Safeway deciding it's better for their shareholders to opt in to that [merger with Albertsons] rather than go it alone is a signal they are being challenged in the marketplace certainly," he says. "It's getting attacked from all sides."

The merger with Albertsons should allow Safeway to improve its leverage with suppliers so that it can purchase items at a lower cost. It also owns desirable locations.

Cerberus, which has experience in the supermarket business, leveraged the Safeway acquisition to make the deal possible. "The opportunity is enabled by the cheap capital available," Dykstra says. "They are getting so big, their efficiencies are getting dramatically better than they ever imagined."

Chicago-area freelance journalist Ann Meyer is a regular contributor to Retail Leader. She has written for the Chicago Tribune, Chicago magazine, BusinessWeek SmallBiz, Crain's Chicago Business and Internet Retailer.