PWC just came out with its Q2 2014 update for US Retail and Consumer Deals Insights, its quarterly report about M&A activity in this country. A total of eight multibillion dollar deals took place in the quarter, with four in food and beverage. That’s tasty M&A indeed.
But the big question still remains: What’s going to happen over the remainder of the year? PWC believes the retail and consumer sector will continue to see brisk M&A activity on deals valued over $500 million. After all, when mergers and acquisitions are announced, stocks tend to lift in anticipation of the new synergies. That’s a huge opportunity for investors who can get in ahead of the news.
So, with more than a little bit of speculation, here are three potential stock-lifting M&A deals we could see by 2015.
M&A Deal # 1 — Diageo (DEO)
Diageo (DEO) just announced preliminary Q4 earnings. Guinness, its biggest beer brand, which accounts for 52% of Diageo’s $4 billion in annual beer revenue, saw global sales decline by 1% in the quarter due to softness in Africa and North America. Overall, beer accounts for 21% of Diageo’s $19 billion in annual revenue. While Guinness considered one of Diageo’s strategic brands, it’s clear the beer market isn’t growing.
Putting Guinness and the rest of its beers on the open market would allow it to focus on its spirits business — I might also consider selling the wines but keeping the champagne brands for the luxury market — while simultaneously delivering between $12-$16 billion (based on 3-4x revenue) from any sale. That’s money it could then reinvest in its top brands while also reducing its $16.5 billion of debt.
So, who would be the buyer?
I’ve got two candidates: Anheuser-Busch InBev (BUD) and SABMiller (SAB). Both could easily handle an acquisition of this size, and both would love to have a brand another brand with Guinness’s cachet.
M&A Deal # 2 — Post
Bill Stiritz is one of my favorite CEOs of all time. While most people his age (he’s 80) are retired and playing golf or something, Stiritz is busy building another company. Since Ralcorp spun off Post Holdings (POST) in 2012, Stiritz has been busy transforming the cereal maker into more than just a purveyor of Raisin Bran.
His vision is to build a diversified food business that can compete with the big boys like General Mills (GIS) and Kellogg (K). Detractors suggest the $4 billion in acquisitions he’s made over the past 12 months don’t follow any kind of coherent strategy, that’s he’s simply piling up the debt with no end game in sight.
That might be true for other executives, but Stiritz has made a career out of mystifying so-called experts while making shareholders (and himself) very wealthy. As Stiritz himself suggests, “Post isn’t in the game for small change … It’s hard to judge transformation midstream … this is not the first time outsiders have questioned my moves.”
While I’d love to see POST pull off a massive acquisition such as buying Hain Celestial Group (HAIN), the debt incurred to do this M&A magic trick would be too onerous even for a man as bright as Stiritz.
In light of this, I suspect that Annie’s (BNNY), the California-based maker of healthier food products, is a very real M&A candidate for the company. When it went public in March 2012, Annie’s came out of the gate like a horse on fire with BNNY stock rising 89% in its first day of trading. Since then, it’s down 16% through July 30.
Recently, the CNBC show Fast Money highlighted the reasons why Annie’s would be a great bolt-on acquisition for larger food companies. This type of business that’s struggling with growth would benefit greatly from Stiritz’s leadership. Look for it to happen.
M&A Deal # 3 — Cambell Soup
Of all the major publicly traded processed and packaged goods companies, Campbell Soup (CPB) is one of the worst performers over the past year, down 11%. And that’s after Gene Marcial’s July 16 column in Forbes speculating that the maker of soup and juices and other food products was a potential takeover target for Warren Buffett.
The truth is, CPB stock has been fundamentally broken for several years.
Over the past decade, on only four occasions has it managed to beat its peers — averaging 7.5% on an annualized basis, more than four percentage points worse than its peers and 73 basis points less than the S&P 500. Given these results, it’s not surprising that writers as experienced as Marcial are raising questions about it remaining independent.
Would Buffett really make another food move so soon after buying Heinz in partnership with 3G Capital?
I don’t think so.
The partnership used a lot of debt to finance the Heinz deal, and Buffett will want that trimmed before wading back into the food pool. Any deal to acquire CPB stock would cost the buyer at least $20 billion including assumed debt. While CPB does have some strong brands (Campbell Soup, V8, Bolthouse), none are more iconic than Heinz which he already owns. I’d say he passes.
However, that doesn’t mean somebody else won’t come along and make an offer to the Dorrance family, who own 42% of CPB stock. If I had to wager, I’d look for a large food company in South America looking to grow in the U.S. market. Two possibilities include Femsa (FMX) which owns the largest chain of convenience stores in Mexico along with 20% of Heineken (HEINY) and 48% of Coca-Cola Femsa (KOF) and JBS S.A. (JBSAF), whose majority owned Pilgrim’s Pride (PPC) tried to buy Hillshire Brands (HSH) but was unsuccessful.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.