The content on this website is intended for investment professionals and institutional asset owners. Individual retail investors should consult with their financial advisers before using any of the content contained on this website. Breckinridge uses cookies to improve user experience. By using our website, you consent to our cookies in accordance with our cookie policy. By clicking “I Agree” and accessing this website, you represent and warrant that you are agreeing to the above statements. In addition, you have read, understood and agree to the terms and conditions of this website.

Corporate

Perspective published on January 16, 2018

Why IG Food Companies Have a Big Appetite for M&A

The first can of Campbell Soup Company’s ready-to-eat tomato soup was introduced in 1895, more than 120 years ago. However, it’s important to recognize that consumer tastes have changed over the past century. Consumers today are more health conscious, their consumption of bread, cereal and unwholesome food is declining and their consumption of organic, all-natural foods is increasing – trends that are particularly challenging for packaged food companies. Today’s grocery shoppers are also putting more private-label brands into their carts, and are more concerned with food companies’ management of environmental, social and governance (ESG) issues. These shifting consumer preferences are significant factors in the recent spike of M&A in the food industry.

First, one of the most prominent ways to address the challenges of higher demand for healthier products is the use of M&A to both diversify into better-for-you foods and to pare back on the concentration of unhealthy or traditional packaged foods, which have reported less-than-stellar growth. Per a 2015 Nielsen survey, key purchaser criteria for consumer products include the product being known for its health and wellness benefits (62 percent of respondents); the product being made from natural and/or organic ingredients (57 percent); and the product coming from a company known as environmentally friendly (45 percent).1 The industry’s growth is challenged by the companies’ needs to manage these new preferences (Figure 1).

For example, Campbell’s has entered an agreement to acquire snack maker Snyder’s-Lance for $4.9 billion in cash, which will allow Campbell’s to diversify into the convenience and natural channels and increase its portfolio of wholesome snacks (e.g. Snyder’s Pretzels and Emerald Nuts). Campbell’s is planning to finance the acquisition through $6.2 billion of debt, per the company. Similarly, in December, the Hershey Company announced that it plans to purchase Amplify Snack Brands Inc. for $1.6 billion in cash. Amplify’s portfolio includes better-for-you snacks such as Skinny Pop and Oatmega; these products will help shift the product portfolio slightly away from sweets and toward salty snacks. Last October, Conagra Brands Inc. (best known for Hunt’s, Reddi-Wip and Chef Boyardee) also announced that it completed the acquisition of Angie’s Artisan Treats LLC, maker of Angie’s BOOMCHICKAPOP, which is a gluten-free, non-GMO whole grain popcorn.

Second, rising M&A is partly due to growth in demand for private-label products. Campbell’s brand is strong; it was, after all, iconic enough to be a focal point of some of Andy Warhol’s most famous works of art. Strong brand presence helps maintain consumer brand loyalty, economies of scale with manufacturers and strong retailer relationships. However, Campbell’s and other food companies are now in an environment where brand loyalty and shelf-space advantages matter less. Rising e-commerce in groceries has eliminated much of the shelf-space challenge facing smaller companies, which are now more easily discovered on grocer internet platforms. In addition, consumers are exhibiting less brand loyalty and are buying more private-label products than ever. Millennial and Gen X generations purchase the most private-label products, a nod to the shift in consumer patterns since the 1960s (Figure 2).

A third reason for the uptick in food company M&A is the growing push for higher returns from activist investors. They are encouraging food companies to make acquisitions or aggressively cut costs given the low growth in the industry and the still-low interest rate environment.

M&A is not the only way that food companies are responding to shifting consumer preferences. They are also ratcheting up research and development for product innovation. Also, to buttress efforts to improve their ESG profiles, food companies are aiming to source businesses that have strong sustainability standing. Food companies are also seeking to better manage their use of environmental resources (such as water).

In our view, the changing consumer demands represent an opportunity for consumer products companies to adapt to consumer preference changes, take advantage of premium pricing that can be placed on organic/health brands and aggregate a portfolio of more sustainable products and brands. These actions will mitigate some of the risks associated with the growth in private-label products.

We continue to evaluate the risks and opportunities presented by food M&A through our rigorous bottom-up research. Whether driven by cost considerations, market share enhancement or product sustainability, M&A is here to stay. While food company balance sheets are generally healthy, like the IG sector overall, financial leverage is materially higher than normal, and the credit implications of M&A and other shareholder-friendly actions must be closely monitored.

 

[1] The Nielsen Company Global Sustainability Report, an online survey of 30,000 consumers in 60 countries to assess how sustainability impacts purchasing decisions, October 2015 (the most recent report). Key sustainability purchasing drivers were categorized as either “Very Heavy Influence” or “Heavy Influence” by the percentage of respondents.

 

DISCLAIMER: The opinions and views expressed are those of Breckinridge Capital Advisors, Inc. They are current as of the date(s) indicated but are subject to change without notice. Any estimates, targets, and projections are based on Breckinridge research, analysis and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.

Nothing contained herein should be construed or relied upon as financial, legal or tax advice. All investments involve risks, including the loss of principal. An investor should consult with their financial professional before making any investment decisions.

Some information has been taken directly from unaffiliated third party sources. Breckinridge believes such information is reliable, but does not guarantee its accuracy or completeness.

Any specific securities mentioned are for illustrative and example only. They do not necessarily represent actual investments in any client portfolio.