Food & Beverage
Volume 4 M&A Update Exclusive Interview with General Mills Chairman Steve Sanger Recent Acquisitions Public Market Valuations
A division of Wells Fargo Securities, LLC
Merger & Acquisition Update
Strategic Buyers Announce Over $18 billion in 2007 Divestitures
Kevin Hunt, CEO of Ralcorp, called his company’s $2.6 billion agreement to acquire the Post cereal business of Kraft Foods “a watershed event.” In terms of Food Industry mergers & acquisitions, the November 15 transaction was the latest installment in a year of “shedding events,” where over $18 billion in business lines have changed hands among leading food players. In an effort to streamline portfolios, corporate divestitures have played a major role in a near-record year for Food Industry mergers & acquisitions. In 2007, food companies spent a total of $24.4 billion on 148 domestic and cross-border acquisitions. While the number of transactions ended the year 12.4% below 2006 totals, aggregate M&A spending increased 51.4% in 2007 due to a number of large corporate divestitures. Kraft’s sale of its Post cereal division epitomizes the trend of businesses trading hands with the goal of creating greater value. While the Post cereal unit was no longer core for Kraft, its $1.1 billion in sales would be a meaningful increase for Ralcorp. According to a company statement, the Post unit could increase Ralcorp annual sales by as much as 50% to $3.3 billion. Prior to Post, Kraft was involved in another blockbuster business unit swap, this time on the buyside. In November, Kraft received EU approval for its $7.2 billion purchase of Groupe Danone’s biscuit unit, the largest single Food Industry acquisition this year. The transaction, originally announced on July 3, 2007, will add Danone’s Petit Ecolier chocolate biscuits and TUC crackers to Kraft’s Oreo and Ritz brands and “transform the Domestic Food Industry M&A Activity
$30,000 187 160 140 $18,000 $17,595 200 180 169 $24,394 160 148 $16,144 120
international business at Kraft,” according to Irene Rosenfeld, Kraft Chairman and CEO. A similarly noteworthy divestiture example is Nestlé’s second quarter acquisition of Gerber Products from Novartis for $5.5 billion. Already the world’s largest manufacturer of infant nutritional products, Nestlé’s sales in this category were based in large part on leading positions in developing countries like Brazil and China, with no presence in the U.S. market. With the acquisition of Gerber, Nestlé’s global baby-food business will now be roughly the size of its confectionary business. Aside from these prominent deals, earlier this year Saputo acquired Cheese & Protein International from Land O’Lakes Inc. for $216 million in cash and B&G Foods acquired the Cream of Wheat and Cream of Rice hot cereal brands from Kraft Foods for approximately $200 million in cash. Capping this year of divestitures, The Campbell Soup Co. announced on December 20 the sale of its Godiva Chocolatier unit to Yildiz Holding for $850 million in order to free up cash and focus on its more traditional soup and snack businesses. General Mills Chairman Steve Sanger told Barrington that he believes this trend of business unit divestitures will continue as leading Food companies make internal strategic evaluations. “I think you will continue to see some companies looking to rationalize their portfolios, to make sure they are focusing on their most promising businesses,” Sanger told Barrington, “and those that do not fit that description will be offered up for sale.” Domestic Food Industry Divestiture Activity
$20,000 67 $16,000 $13,003 $12,000 $8,832 42 40 75 69 64 57 60 80 $18,243
$24,000
$12,000 $7,262 $6,000
80
$8,000 $4,395
$6,310
$5,408
40
$4,000
$3,459
20 $3,134
$0 2002 2003 2004 Value ($mm) 2005 No. of Deals 2006 2007
0
$0 2002 2003 2004 Value ($mm) 2005 No. of Deals 2006 2007
0
Source: FactSet Mergerstat, LLC
Source: FactSet Mergerstat, LLC
Q&A with General Mills Chairman Steve Sanger
Stephen W. Sanger is chairman of General Mills and served as both chairman and chief executive officer of General Mills from May 28, 1995, to September 24, 2007. Mr. Sanger joined General Mills in 1974 and progressed through various positions in marketing management across the company’s consumer food businesses, including president of the Big G cereal division and president of Yoplait USA. He was elected to the board of directors in 1992 and was named president of General Mills in October 1993. Barrington Associates: Mr. Sanger, what are the top strategic initiatives at General Mills right now and where are you seeing the most growth? Steve Sanger: We are focused on a few top performance drivers, including margin and channel expansion, brand building, and innovation. With that said, there are two areas of focus that I would highlight as having the most growth for us right now. One is the whole area of health, nutrition, and wellness in our products. At a time when consumers are worried about eating things that are healthy, and about managing their weight, a lot of our innovation and innovation is what drives our business - is focused on bringing forth new products and product improvements that focus on that set of benefits. By doing so we have seen superior growth - our Nature Valley granola products line is growing double digits, our Yoplait Light yogurts, which are supported by a clinical study that says they help you lose weight, have been growing very rapidly, and among our cereals, products like Fiber One and Cheerios are the fastest growing in our line. So health and nutrition is one broad area where we’re putting a lot of focus. Another area of focus is international markets. Our international sales have grown tenfold in the twelve years since I became the CEO, and we are now about $3 billion in international sales, including our share of joint ventures. As modern retailing takes hold in markets like China and India, we are going to see tremendous growth. As a result, we are concentrating on our international business - it is our fastest growing segment today, has been for the last five years, and I would fully expect it to be over the next five years as well. Barrington: With regard to international markets, what is your strategy for deploying established domestic brands like HäagenDazs, Betty Crocker, Nature Valley, etc., versus local market brands? Sanger: I’d say we do combinations and permutations of both. For example, in China, which is now one of our top three international markets, I would highlight two brands in particular: one is Häagen-Dazs, which is a U.S. brand, the other is a brand called Wanchai Ferry, which is a Chinese frozen dumpling product that originated in Hong Kong. The Wanchai Ferry brand has done so well in China that we introduced it into Europe and just this year launched a dinner kit line in the United States. So, we are taking U.S. brands like Häagen-Dazs and placing them in international markets, but we are also moving internationally-originated brands that we think have potential and expanding them into other international markets or even into the U.S. All of this is based on an assessment of what we think will appeal to the consumers in a particular market. Barrington: You mentioned your focus on margin and channel expansion. How does General Mills accomplish these initiatives? Sanger: Margins are critical because input costs are rising and it’s tough for food manufacturers to hold their margins, much less increase them. We have developed an extremely disciplined system called holistic margin management, which is about taking out costs that don’t add value to our consumers. When I say taking out non-value adding costs, just to give you one example, we used to have twenty different shapes of pasta in various flavors of our Hamburger Helper products: round noodles, flat noodles, twists, bowties, etc…We discovered that consumers really didn’t care about all this uniqueness of shape so we cut back to ten shapes that still offered plenty of variety. It turns out that consumers didn’t notice the difference and it saved millions of dollars in cost of pasta. And that’s just one example. We have a whole laundry list of things we are doing to try to increase our margins. Some of those are on the supply side, but they also include efforts in our promotion costs, in the administrative areas, and elsewhere; so margin expansion is really an important objective for us. Barrington: When it comes to channel expansion, how has your strategy evolved? Sanger: Our consumers used to buy a majority of their groceries at grocery stores like Safeway, Kroger, or Albertson’s. Today, I’ve seen figures that say consumers buy something like fifty percent
Continued on Page 4
Exclusive Interview with Steve Sanger of General Mills Continued
of their needs in stores that you wouldn’t call traditional grocery. That could be a Wal-Mart Super Center, a Dollar Store, or a Costco or other club store. You even see food products sold in places like Best Buy, where they may be selling granola bars next to the checkout. So there are just a lot more places today where people buy food. Each of those channels has unique requirements, which means that you have to be able to adapt your packaging and product offerings to serve what consumers are looking for in each of those channels. We have been successful at achieving faster growth in our non-grocery channels than our grocery channels, primarily because we’ve been able to adapt to the needs of the consumers in each of those particular channels, and we will continue to work hard to do that. Barrington: Earlier this year, General Mills acquired U.K.-based frozen pastry-maker Saxby Brothers. Can you talk about your view on strategic acquisitions presently? Sanger: M&A is certainly a piece of the puzzle when we look at expansion of our business and international expansion in particular. Our basic business model is built around organic growth driven by product innovation, brand building, and advertising our brands with consumers. Unlike some companies, we do not build assumptions about acquisitions into our long range plans because we view acquisitions as more opportunistic. We will, however, pursue acquisitions that will strengthen our position in one of our core categories, give us access to a specific geography we are targeting, or give us a capability we think we need. The acquisition you referenced, Saxby Bros., is in a geography where we were already present, in a category — dough products — that is core to us, and it gave us a capability in a channel that we did not have. We view international as one of the priority areas where we would seek to use acquisitions to supplement our organic growth. Barrington: International acquisitions definitely seem to be a trend, but what other trends are you seeing in Food Industry M&A? Sanger: I would say that there was a spate of big bang kind of deals around 2000. A number of the big companies that were long time names in the food industry were acquired: Best Foods, Quaker Oats, Nabisco, Purina, Pillsbury, and Keebler. Then there was period of digestion, and you saw very few of those big deals for a couple of years. Now what we are seeing, certainly in the domestic markets, is companies buying specific business lines from other companies rather than acquiring the entire company. They are not the big bang M&A deals, but companies are buying and selling parts of their businesses to make sure their portfolios are focused on the most important stuff. It has been a particularly good time to be selling pieces of a portfolio because the private equity presence out there has made it a bit of a seller’s market for “orphan” brands. That is less true right now, but it has been the case for the last 3-4 years. I think you will continue to see some companies looking to rationalize their portfolios, to make sure they are focusing on their most promising businesses, and those that do not fit that description will be offered up for sale. And those things may be secondary to one company but very much in a primary business area to another, so you will see parts of a line changing hands. Barrington: Aside from mergers & acquisitions, what other strategic transactions or agreements are at the forefront of your planning? Sanger: We are also focused on acquiring technology or products on a licensed basis from other companies or sources outside General Mills. Several of our new products incorporate technology that we found somewhere outside General Mills. For example, we have just introduced a carbonated yogurt for teens called “Fizzix.” It is part of our Go-gurt line, and we found the technology to produce it at Brigham-Young University, which is not necessarily where you would expect to find carbonated yogurt. We also have a new snack product for kids called “Bungee Fruit,” which is stretchy strings of fruit. It is a product that was being sold outside the U.S., under a different brand name. We believed it was a product that would fit our Fruit-Rollups line, so we worked with the partner to develop a version of the product we would sell in the United States. Barrington: A closing thought on mergers & acquisitions: do you think the tightening of the debt capital markets will change the M&A landscape for General Mills and other strategic buyers? Sanger: I think it’s true that the amount of cheap money available to private equity has probably peaked. But even when we get through this period I still think private equity will continue to be an important potential outlet for pieces of businesses that could be more valuable to party A than party B. If we or anyone else in our industry wants to sell a brand or a line of business, the more buyers there are, the more chance there is that someone will find an asset particularly valuable. I think perhaps the tightening debt market rebalances the role of strategic buyers a bit; but ultimately it comes down to, for any given acquisition, who has the most ability to add value, and having private equity bidding, along with strategic buyers, just makes for a better market.
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Recent Strategic Acquisitions - Food Industry
Dean Foods Acquires Wells’ Dairy’s Milk Business December 21, 2007 - Dean Foods acquired Wells’ Dairy’s milk business for an undisclosed price. The acquisition includes the Le Mars milk plant, which employs 180 workers. Yildiz Holding Acquires Godiva December 20, 2007 - Yildiz Holding of Turkey acquired Godiva Chocolatier from Campbell Soup for $850 million. Godiva is a leading premium chocolate business with revenues over $500 million. Heinz Acquires Longfong Foods November 29, 2007 - HJ Heinz acquired Shanghai Longfong Foods for about $33 million in cash. Shanghai Longfong manufactures and distributes processed food products in Shanghai. Ralcorp Holdings Acquires Post November 15, 2007 - Kraft Foods announced it will sell its Post cereals division to Ralcorp Holdings for about $2.6 billion. Ralcorp is a provider of store brand cereals and foods.
Date
1-Dec-07 0-Dec-07 9-Nov-07 1-Nov-07 14-Nov-07 6-Nov-07 16-Oct-07
McCormick Acquires Lawry’s November 14, 2007 - McCormick & Co agreed to acquire the assets of Lawry’s from Unilever for approximately $605 million in cash. Lawry’s is a manufacturer and retailer of a variety of marinades and seasoning blends, with $150 million in annual sales. Kellogg Acquires Wholesome & Hearty Foods November 6, 2007 - Kellogg acquired Wholesome & Hearty Foods for an undisclosed price. In a related transaction, Kellogg also acquired Bear Naked, a seller of natural granola products, for a combined price of $122 million in cash. Chiquita Acquires Verdelli October 16, 2007 - Chiquita Brands International subsidiary Fresh Express acquired Verdelli Farms for an undisclosed amount. A producer and supplier of fresh fruits and vegetables, Verdelli Farms has annual sales of approximately $80 million. Hormel Acquires Burke August 23, 2007 - Hormel Foods acquired Iowa-based Burke Corp, a manufacturer of
pizza toppings and cooked meat products, for approximately $110 million. The acquisition adds 239,000 square feet of production and manufacturing to Hormel’s capabilities. ConAgra Acquires Alexia Foods July 23, 2007 - ConAgra Foods acquired Alexia Foods for approximately $50 million in cash. Alexia Foods manufactures packaged high-end potato products and generates approximately $35 million in annual sales. Kraft Acquires Danone Biscuit Unit July 3, 2007 - Kraft Foods agreed to acquire the global biscuit business of Groupe Danone, with 36 manufacturing facilities in 20 countries, for $7.2 billion in cash. Kraft Foods seeks to extend its presence in snack foods globally with this acquisition. TreeHouse Acquires ED Smith June 25, 2007 - TreeHouse Foods acquired the operating businesses of ED Smith Income Fund for $217.1 million in cash. ED Smith is a manufacturer of branded and private label jams, ketchup, and sauces.
Deal Size EV / ($mm) Revenue $80 $ $,600 $60 $1 $110 $0 $7,14 $17 $9 $89 $,00 1.70x .6x 4.0x .74x 1.09x 1.9x .44x
Buyer
Dean Foods Co. Yildiz Holding HJ Heinz Co. Ralcorp Holdings, Inc. McCormick & Co., Inc. Kellogg Co. Chiquita Brands
Target
Wells’ Dairy, Inc. - Milk Business Godiva Chocolatier, Inc. Shanghai Longfong Foods Co. Kraft Foods - Post Cereals Business Unilever PLC - Lawry’s Wholesome & Hearty Foods Verdelli Farms Burke Corp. Alexia Foods, Inc. Groupe Danone - Global Biscuits Operations ED Smith Income Fund Cadbury Schweppes - Australia Jams Business Silver Ventures’ San Antonio Farms Novartis - Gerber Products Co.
Target Business Description
Produces and manufactures dairy products Produces and markets chocolates and ice creams Manufactures and distributes processed foods Manufactures cereal breakfast foods Manufactures marinades and seasoning blends Produces and markets meatless food products Processes and markets fresh fruits and vegetables Manufactures and markets cooked meat products Manufactures high-end potato products Manufactures and distributes biscuits Manufactures specialty sauces, ketchup, and fruit fillings Manufactures jams, dessert toppings, and jellies Manufactures salsas, dips, and sauces Manufactures baby foods and infant care items
-Aug-07 Hormel Foods Corp. -Jul-07 -Jul-07 -Jun-07 -Jun-07 -Apr-07 1-Apr-07 ConAgra Foods, Inc. Kraft Foods, Inc. TreeHouse Foods, Inc. HJ Heinz Co. TreeHouse Foods, Inc. Nestlé SA
Recent Strategic Acquisitions - Beverage Industry
HM Capital Patners Acquires H2O December 20, 2007 - HM Capital Partners acquired Advanced H20 from LaSalle Capital Group Partners for an undisclosed amount. Mercer Island, WA-based Advanced H20 is a provider of private-labed bottled water and flavored beverages. SABMiller to Acquire Grolsch November 19, 2007 - SABMiller made an offer to acquire Grolsch for $1.2 billion. Netherlands-based Grolsch manufactures and sells beer under the Grolsch and Amsterdam brands. Redhook to Acquire Widmer Brothers November 13, 2007 - Redhook Ale Brewery agreed to acquire Widmer Brothers Brewing Company from Anheuser-Busch for $50 milllion, operating as Craft Brewers Alliance. Portland, OR-based Widmer Brothers produces and distributes beer. Constellation Brands to Acquire Fortune’s Wine November 12, 2007 - Constellation Brands has agreed to acquire Fortune Brands’ US wine business for $885 million, including 1,500 acres of Californian vineyard and five wineries. Pepsi Acquires Sandora November 6, 2007 - PepsiAmericas and PepsiCo have announced a joint acquisition of the remaining 20% of Sandora for $136.7 million. Previously, the firms had jointly acquired 80% of Sandora for $542 million plus assumed debt. Sandora is the leading juice company in the Ukraine. SABMiller & Molson Coors to Merge US Operations October 9, 2007 - SABMiller and Molson Coors Brewing Company, the nation’s No. 2 and No. 3 brewers, announced plans to merge their operations in the United States and Puerto Rico. The new MillerCoors joint venture would have $6.6 billion in annual sales and is projected to result in $500 million in annual cost savings. DC Brands to Acquire Health Advantage August 7, 2007 - DC Brands International agreed to acquire Health Advantage Research & Development Nutrition for an undisclosed amount. Health Advantage Research & Development Nutrition is a manufacturer of nutritional drinks. Ste Michelle to Acquire Stag’s July 30, 2007 - Ste Michelle Wine Estates, a subsidiary of UST Inc, and Marchese Piero Antinori agreed to acquire Stag’s Leap Wine Cellars for approximately $185 million. Stag’s Leap Wine Cellars has a winery and vineyards in Napa Valley.
Recent Private Equity Transactions
American Capital Acquires NECCO December 28, 2007 - American Capital Strategies acquired New England Confectionary Co from UIS for and undisclosed amount. Revere, Mass-based NECCO is a confections manufacturer. Mitsubishi Acquires Stake in Kadoya December 13, 2007 - Mitsubishi acquired an additional 5.1% minority stake in Kadoya Sesame Mills from Oaktree Capital Management for approximately $8.5 million. Kadoya Sesame Mills is a producer of sesame seed oil. Riverside Acquires Green Glen November 7, 2007 - GreenLine Foods, a portfolio company of The Riverside Co, acquired Green Glen Produce for an undisclosed price. Green Glen Produce supplies packaged green beans. Brazos Acquires Sadler’s Barbecue November 5, 2007 - Brazos Private Equity Partners and Wholesome Holdings Group acquired Sadler’s Barbecue Sales from the Sadler family for an undisclosed amount. Texas-based Sadler’s provides pit-smoked meats, BBQ sauces, and cooked meats. Blackstone Acquires Vistar September 17, 2007 - Blackstone Group acquired a 67% interest in Vistar Corp from Wellspring Capital Management for $420 million. Vistar is a food distributor specializing in the Italian, Pizza, Vending, Office Coffee, Concessions, Fundraising, and Theater markets. Palladium Acquires Castro Cheese September 17, 2007 - New York-based Palladium Equity Partners acquired Castro Cheese for an undisclosed amount. Houston, TX-based Castro Cheese is a leading manufacturer and distributor of Hispanic cheeses and creams. Catterton Partners Acquires Brach’s September 17, 2007 - A portfolio company of Catterton Partners, Farley’s & Sathers Candy agreed to acquire Brach’s Confections from Barry Callebaut for an undisclosed amount. Dallas, TX-based Brach’s has annual gross sales of approximately $270 million. North Castle Acquires Atkins September 17, 2007 - North Castle Partners acquired an undisclosed controlling interest in Atkins Nutritionals. Melville, NY-based Atkins Nutritionals is a widely-known brand in the $30 billion weight loss industry.
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Public Market Valuations (Enterprise Value to EBITDA Multiples)
Diversified Foods
12. 0x
11. 0x
10. 0x
10.91x 10.84x 10.4x 10.01x
9. 0x
8. 0x 1Q 2006 2Q 2006 3Q 2006 4Q 2006 1Q 2007 2Q 2007 3Q 2007 4Q 2007
8.14x
G eneral M ills, Inc.
ConA gra Foods, Inc.
Campbell Soup Co.
K raf t Foods, Inc.
The J. M . Smuck er Co.
20. 0x
Meat Processing
16. 0x
12. 0x
8. 0x
10.7x 8.91x 7.77x .81x
4. 0x 1Q 2006 2Q 2006 3Q 2006 4Q 2006 1Q 2007 2Q 2007 3Q 2007 4Q 2007
H ormel Foods Corp.
Smithf ield Foods, Inc.
Tyson Foods, Inc.
Seaboard Corp.
18. 0x
17.86x 14.87x 1.4x 10.4x 10.01x
Wine & Beverage
14. 0x
10. 0x
6. 0x 1Q 2006 2Q 2006 3Q 2006 4Q 2006 1Q 2007 2Q 2007 3Q 2007 4Q 2007
A nheuser-B usch Companies, Inc.
Coca-Cola Co.
PepsiCo, Inc.
B row n-Forman Corp.
Constellation B rands, Inc.
Source: Capital IQ
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The Barrington Food & Beverage Report is published by Barrington Associates, a division of Wells Fargo Securities, LLC. Barrington provides investment banking services to companies with revenues of $ million to $1 billion.
For more information about Barrington’s Food & Beverage investment banking services contact:
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