Warren Buffett and 3G Capital teaming up again on the Kraft (KRFT) deal should send two of the biggest food companies into action.
Enter PepsiCo (PEP) and General Mills (GIS), two companies with the financial firepower to add to strategic areas of their sizable packaged-food portfolios. For each of these companies, additions to the portfolio won't be made in order to streamline sluggish businesses (little different than the Heinz and Kraft deals) and save money, but instead to unlock new areas of growth. The focus areas of these companies are going to be in organics and what the industry calls "better for you" snacks.
Here are some things execs at each company recently shared with me.
General Mills: The company has quickly integrated its $860 million purchase of organic food maker Annie's (BNNY). I loved this purchase from day one, which brings General Mills into new zones of the supermarket with a very trusted brand by the chief decision maker of the house -- mom.
Now, the company is full steam ahead in introducing line extensions to Annie's. First will be a range of soups this summer. Another is likely to be meal kits, playing off General Mills' strength in the category under its Old El Paso Mexican cuisine line. With Annie's woven in, and General Mills significantly restructuring its operations in the past two years, expect to learn about its acquisitions plans in coming months when it details its latest operational plans.
"We will continue to pursue our strategy of adding to our portfolio in emerging markets, and in the U.S. in the wellness and natural areas," General Mills CFO Don Mulligan told me in an interview last week. General Mills is rumored to be preparing a sale of its Green Giant frozen vegetable business, which would free up funds to be reinvested in a higher-growth area within the next 18 to 24 months.
"We are constantly looking at our portfolio, and obviously we won't announce anything until we are ready to pull the trigger, but we continue to look on that side (divesture) as well," concluded Mulligan. The minor problem from an investor standpoint is that new, fast-growing, publicly traded companies in the packaged-food space are hard to find.
And I don't think General Mills is inclined to add significant leverage to its balance sheet to gobble up a Hain Celestial (HAIN), which remains on an impressive growth spurt. I also think General Mills acquiring Greek yogurt company Chobani is out of the question given the resurgence in its Yoplait yogurt business amid packaging improvements, product reformulations and the arrival of new products (such as Greek yogurt whips -- hot-selling item, trust me).
Pepsi: With an activist off its back, I think Pepsi could soon get back to its acquisitive ways. The company has a long history of large, fundamentally transformative acquisitions. It's the type of company that could purchase a Hain Celestial to boost a snack business that has been growing quite nicely.
"We feel like we have the portfolio in a pretty good spot right now," Pepsi CFO Hugh Johnston told me in mid-February. He added, "We'll see what comes along -- we are constantly out there talking to basically everyone."
Pepsi generally allocates about $500 million a year or so to small "tuck-in" types of deals, according to Johnston. That is a figure that could indeed be raised if the right opportunity opens up, and considering the dollar's strength and low-interest-rate environment.
All in all, it's game on, packaged-food companies -- either start buying innovation or Warren Buffett and his besties at 3G Capital are going to purchase and hold them forever.
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