Shopping for Growth

With organic growth hard to come by, U.S. retailers and food and beverage companies have stepped up the pace of mergers and acquisitions during the past 18 months, and consolidation is expected to continue.

After a hunkering down period during the recession, many food companies have cash to spend and are looking for opportunities to grow their businesses, experts say. As the economy picks up, companies are starting to deploy their reserves. While many are reinvesting in their existing businesses through plant expansions or infusions in research and development, others are looking for strategic acquisitions.

The trend toward consolidation is "based on efficiencies and in order to find growth when the market's really not growing," says Chris Harned, managing director, Robert W. Baird & Co., a Milwaukee-based investment banking firm. "To find growth, you've got to go buy stuff."

Retail Consolidation Heats Up

Source: Dealogic, July 17, 2013

Berkshire Hathaway and 3G Capital Inc.'s $36.7 billion acquisition of H.J. Heinz in February was the largest deal of 2013 to date, according to Dealogic, which tallied 126 retail M&A deals announced in 2013 through July 17, as well as 120 acquisitions by food and beverage manufacturers and 147 by consumer products companies. While slightly behind 2012 M&A activity, the deal volume for food companies is running ahead of annual volume from 2008 to 2011.

Pent Up Demand

Grant Thornton's research indicates U.S. food and beverage mergers and acquisitions increased 5.8 percent in 2012 to the highest volume level since 2007. The firm expects the strong M&A market to continue and says the bull market is driving up multiples.

"The economy is a large driver, but there's still a lot of pent up money and pent up demand for good solid acquisitions that's going to continue to drive that activity," says Tony Perazzo, audit partner and lead at Grant Thornton's food and beverage practice in San Francisco. "You're seeing a lot of smaller CPGs being swallowed up."

Larger food and beverage players are looking to acquire innovative niche companies, particularly in the organic and natural foods space, Perazzo says. "What I've seen over the last six months is there seems to be a tremendous amount of competition out there for these emerging companies and growing companies. A lot of acquisition targets have been sitting on the sideline waiting for the right valuations. Some have been waiting to try and get those deals done," Perazzo says.

In January, Post Foods bought San Francisco-based Attune Foods, which makes natural and organic cereal products under the Erehwon, Skinner's and Uncle Sam brands. A few months later, B&G Foods agreed to acquire natural snacks company Robert's American Gourmet Food, maker of Pirate's Booty, Smart Puffs and Original Tings, from private equity investors and the company's founder, for about $195 million in cash, the company said.

    Capital Availability Drives Activity

Source: Dealogic, July 17, 2013

    Innovative Retailers Go Public

Source: Dealogic, July 17, 2013

Campbell Soup Co. has advanced its acquisition strategy since Denise Morrison took the helm as CEO in August 2011, says Harned. "Campbell Soup under their new CEO is really becoming much more dynamic out there. They're trying to change the nature of what they're all about," he says.

Low Cost of Capital

But the acquisition spree also is fueled by the low cost of capital, Harned says. "Some of these larger companies like Campbell are trying to find a way to reinvigorate their business," he says.

Campbell acquired Bakersfield, Calif.-based Bolthouse Farms from private equity firm Madison Dearborn Partners for $1.55 billion in July 2012. Bolthouse makes premium beverages aimed at health-conscious consumers as well as salad dressings. In mid-July, Campbell agreed to buy Emeryville, Calif.-based Plum Organics, maker of organic baby food and fruit and vegetable snacks for children.

The fast-growing organic baby food category also saw Hain Celestial, owner of Earth's Best baby food, announce in May plans to acquire Ella's Kitchen, based in the U.K., while in the same month Danone agreed to buy a 90 percent stake in U.S.-based Happy Family, according to news reports.

"What's happening is the larger players have a decision to make. They can make investments and start up their own [niche companies] or they can go out and buy them. We're seeing more the latter than the former," Perazzo says.

Retailers also are looking for strategic acquisitions to grow their businesses. Cincinnati-based Kroger Co.'s proposed deal to acquire Matthews, N.C.-based Harris Teeter Supermarkets for about $2.5 billion would give Kroger outlets in fast-growing markets in the Southeast and Mid-Atlantic, including in resort areas and college towns. Harris Teeter, with about $4.5 billion in 2012 revenue, also can provide Kroger with expertise in fresh categories and online shopping. But attorneys for Harris Teeter shareholders are arguing the price Kroger has offered undervalues the company. In July, they asked a judge to block the transaction or provide monetary damages to shareholders, the Charlotte Observer said.

Eden Prairie, Minn.-based Supervalu's $3.3 billion sale of five supermarket banners to Cerberus Capital Management LP in March has resulted in an improved financial picture for the parent company. In its first-quarter earnings report announced in July, Supervalu reported earnings per share of 14 cents, well above the 6 cents per share analysts had expected. Reduced costs boosted the company's gross margin to 13.8 percent from 13.5 percent, Reuters said. After selling Albertsons, Acme, Jewel-Osco, Shaw's and Star Market to Cerberus, Supervalu is left with its Save-A-Lot business, independent wholesale unit, and several regional banners, including Cub, Farm Fresh, Shoppers, Shop 'n Save and Hornbacher's.

"Supermarkets have been in the state of real depression for a while. Now they're starting to fight back a little bit....We're going to see more consolidation."

– Christopher Harned,

Robert W. Baird & Co.

"Supermarkets have been in the state of real depression for a while. Now they're starting to fight back a little bit," Harned says. "We're going to see more consolidation."

Pleasanton, Calif.-based Safeway, which has had a stronger financial position than Supervalu, agreed to sell its Canadian stores to Empire Co., which operates the Sobeys chain in Canada, for $5.7 billion. Safeway also recently offered shares in its Blackhawk Network gift card business through a public offering, using the proceeds to buy back Safeway stock. "They're trying to help their balance sheet, help their stock price, help earnings as they reinvest back into the core business," Harned says.

Global Buying and Selling

While the domestic market for mergers and acquisitions is hot, so is the international scene, Perazzo says. "There's no doubt food and beverage companies are investing internationally. Many of them have had it in their fancy plans for a number of years. Finding the right international M&A is going to be critical to their growth."

"There's no doubt food and beverage companies are investing internationally. Many of them have had it in their fancy plans for a number of years. Finding the right international M&A is going to be critical to their growth."

– Tony Perazzo,

Grant Thornton

U.K.-based Tesco is selling its Fresh & Easy chain in the United States, after determining the banner's slow growth and disappointing margins failed to meet the company's expectations. Industry observers said the company underestimated the differences between the U.S. market and its home turf of England and Europe.

China's interest in U.S. food companies is spurring close examination due to perceived cultural differences in food safety standards. U.S. senators in July questioned whether the proposed acquisition of Smithfield Foods by China-based Shuanghui International Holdings for $4.7 billion would impact the United States' competitiveness by exporting production know-how, while others expressed concern Shuanghui would bring inferior standards to U.S. products.

At the same time, activist investor Starboard Value LP, which owns 5.7 percent of Smithfield Foods, asserts Shuanghui's offer undervalues the company. The investor is pressing for Smithfield to be split into three smaller units and sold separately. Doing so, Starboard says, will fetch a higher total price than Shuanghui's bid.

Public Offerings Offer Capital Strategy for Up-and-Comers

The low cost of capital has put a damper on public offerings in the food industry, despite a pickup in U.S. IPOs in general, as most growing retailers and CPG manufacturers rely on debt financing for expansion. But for fast-growing up-and-comers, or the shiny-star divisions locked inside large corporations, IPOs can provide a way to raise capital quickly by liquidating equity.

Overall, when looking at all industries, about two-thirds of capital markets executives expect an increase in U.S. initial public offerings in the second half of 2013, according to a new study by BDO USA. That compares with just 6 percent who foresee a decline in activity. The investment bankers predict a 7.7 percent increase in U.S. IPOs with an average size of $265 million, the study says. But most of the IPOs will be in the technology, energy, health care, real estate and biotech industries.

Dealogic, which tracks deal-making activity, recorded seven IPOs among U.S. retailers in 2012, the highest number since 2004, while IPOs among food and beverage and CPG companies have remained flat since about 2005. For the year to date, Dealogic reported one IPO in each of the three categories, retail, food and beverage, and consumer products.

The grocery retail and food and CPG manufacturing industries are mature enough that most companies can secure capital through debt financing, which is less costly and comes with less red tape than is generally associated with a stock offering, experts say.

A Last Resort
"A driver of the IPO market has to do with how quickly a company is looking to expand. If the debt markets are available to them, going public is generally a last resort today," says Al Ferrara, partner and director of national retail and consumer products at BDO USA. But some companies use IPO capital to pay down existing debt or cash out an owner, he says.

In the supermarket sector, New York-based Fairway Group Holdings, owner of Fairway Market, wanted capital to leapfrog the competition by opening new stores. "It allowed them to get some capital quickly so they can expand. Otherwise, what are you going to do, open up one or two stores a year?" Ferrara says.

The company's April 16 IPO was valued at $204 million, Dealogic says. The specialty grocer with 12 large-format locations in the New York metropolitan area offered 13.7 million shares at $13. The company's stock jumped 33 percent on the first day of trading, Renaissance Capital said. Similarly, Greensboro, N.C.-based The Fresh Market's stock surged 46 percent on its first day of trading when the company went public in late 2010.

Perhaps looking for a similar outcome, Phoenix, Ariz.-based Sprouts Farmers Market filed the paperwork for an IPO May 9 and announced in July that it would offer 18.5 million shares to the public for $14 to $16 a share. It expects to raise $248 million to pay down debt and fund its expansion. "You're starting to see a lot of these boutiques cropping up that have a niche in organic. They're doing fairly well," Ferrara says.

Niche Players
While consumers like the small-format fresh foods concept, Ferrara says most can't grow fast enough on their own to compete with Austin, Texas-based Whole Foods Market. "You start from scratch and open up one or two stores and generate some capital, but the profits generated from those don't equal the capital you need to open up a new store," he says.

In the food and beverage manufacturing industry, Parsippany, N.J.-based Pinnacle Foods' initial public offering was valued at $667 in March, according to Dealogic, which has offices in London and New York. After refinancing, the company will save about $100 million annually on interest expenses, while it also instituted dividend payments of about $84 million annually, Fitch Ratings said. The company owns national brands including Birds Eye vegetables, Van de Kamp's and Mrs. Paul's frozen seafood, and Duncan Hines baking mixes.

Spinning Off Businesses
Some companies also are taking advantage of the improved market conditions to spin off divisions. Dallas-based Dean Foods' October 2012 spinoff of its fast-growing WhiteWave Foods Co. at a value of about $391.0 million was designed to help the company liquidate some of its equity and pay down debt. By separating the unit, which makes Horizon Organic dairy foods and soy and almond milk under the Silk brand, Dean was able to attract investors who see potential in higher-priced organic foods. Broomfield, Colo.-based WhiteWave Foods Co. offered an additional 29.9 million shares July 17, reducing Dean Foods' stake in the company to less than 3 percent.

A spinoff also can allow the parent company to focus on its core business or separate a mature business from a faster-growing unit. Kraft Foods Inc. used the strategy to restructure into two separate publicly held companies, Mondelez International and Kraft Foods Group. And Sara Lee last year spun off its branded meat company into Hillshire Brands and its international coffee and tea business into D.E. Master Blenders 1753.

But companies also can retain a controlling interest in a unit while offering shares to the public. In April, Pleasanton, Calif.-based Safeway offered the public a 19 percent stake in its gift card distributor unit, Blackhawk Network, raising $230 million in an offering of 10 million shares priced at $23, Renaissance Capital said. The IPO valued the company at about $1.2 billion.

"If you have an untapped asset on your books that the market isn't giving you credit for, if you have a diamond in the rough, people don't see the diamond. ... A lot of companies do these spinoffs to unlock inherent value in the company."

– Al Ferrara,


"If you have an untapped asset on your books that the market isn't giving you credit for, if you have a diamond in the rough, people don't see the diamond," Ferrara says. "A lot of companies do these spinoffs to unlock inherent value in the company."
– Ann Meyer

Ann Meyer who is president of media services firm L3C Chicago, serves as senior editor of Retail Leader.