Consolidation is happening with a vengeance. I think it is just the beginning. Why? Because in a slow growth world, where it is tremendously difficult to raise prices, many companies have no choice but to buy other companies in order to please shareholders who will not accept stagnant earnings.
That's how you could get not one, but two bidders for Hillshire Brands (HSH), a sleepy spinoff of Sara Lee, which had earlier this month bid for Pinnacle Foods (PF) in order to spur growth. Growth had been lacking ever since the company was created by the breakup of Sara Lee not that long ago. I was stunned by the $45 bid by Pilgrim's Pride (PPC) for Hillshire and just floored by today's $50 bid by Tyson Foods (TSN).
In retrospect, though, I shouldn't have been surprised. Both Pilgrim's Pride and Tyson are commodity players in the food aisles and they need more heft to deal with their customers in the rapidly consolidating supermarket industry. When you have that heft and you take out costs, you can make a lot of money and give shareholders the earnings-per-share (EPS) gains that they so desperately want. Hence, even though Tyson is willing to pay $5 more per share than Pilgrim's Pride for Hillshire -- and $18 more per share more than this company was selling for just earlier this month -- Tyson said it is still accretive for next year's earnings.
Now, I have to tell you that this level of fevered bidding, after a long dry spell for mergers and acquisitions, is extraordinary. You have to go back to the 1980s, the formative era of consumer packaged goods takeovers, to recall anything like this stupendous and furious consolidation. Those were the days when you just expected bids for food and beverage companies and you got them. Examples include Beatrice, Esmark, Pillsbury, General Foods and many others.
It's all happening again. And we can all cash in on it.
We thought all of this incredible action began when Hillshire Brands launched a bid for a relatively new company, Pinnacle Foods, earlier this month. Pinnacle itself is an acquisition vehicle, which has acquired Birds Eye Foods, Duncan Hines and, most recently, Wishbone salad dressings. Pinnacle made it clear from the inception that it was about buying old brands, typically for borrowed money, and then paying down the debt and doing another deal.
Hillshire, on the other hand, had a huge cash hoard but because of its slow growth non-organic, non-natural brands -- think Jimmy Dean sausages and Ball Park Franks. The company was pretty desperate to do a deal.
This morning, David Faber revealed that long before Hillshire launched the Pinnacle bid, Tyson, a high-profile chicken-and-beef company, had contacted Hillshire about an acquisition.
Hillshire itself is a product of the breakup of Sara Lee, which happened almost two years ago. Similar to Hillshire, Sara Lee didn't get enough respect as a hodgepodge coffee and meat company. The coffee company, DE Master Blenders, got an $8 billion bid from a German company, Joh. A. Benckiser. As of this morning, the rest of the company is worth $6 billion. All because of the urge to merge in order to grow.
Why is this all so significant? It's because the number of growth challenged food companies is extraordinary right now. Both Campbell's Soup (CPB) and Kellogg (K), for example, have very little growth. They could be predator. They could be prey. General Mills (GIS) needs to beef up its natural and organic offerings. How can that company resist Hain Celestial (HAIN) or WhiteWave Foods (WWAV), the two fastest growers that are still bite-sized $5 billion companies.
Hershey's been a terrific grower but you have to wonder if it has, at last run its course and needs to diversify away from the candy aisle. ConAgra Foods (CAG) shot itself in the foot with its last acquisition, an overpay for Ralcorp, but it needs still one more deal to grow. Mizkan, a Japanese company, just paid $2.15 billion for Ragu, a brand that Unilever (UN) cast off. Both Pinnacle and Hormel Foods HRL were rumored to be in on the bidding. J.M. Smucker (SJM), the condiments company were also rumored to be in on the bidding.
Hmmm, Pinnacle, thought to be predator, now prey. Don't you think that Smucker and Hormel hear the footsteps? Kraft Foods (KRFT)is just sitting out there, waiting for someone else to make hay with the company.
A little more than a year ago, Heinz, which was itself challenged to grow, got a huge bid from a Warren Buffett-led group. I thought it would bring on a huge wave of food consolidation. Instead, we saw nothing. Or at least we thought there was nothing until this month began.
Now we know that it isn't just food that is challenged for growth. Clorox (CLX) reported a subpar quarter. You have to believe that another company in the consumer packaged goods industry has to be eying that one. We know that Procter & Gamble (PG) is starved for growth. It can't buy Clorox because of the bleach concentration. But there are plenty of others aisles in the supermarket that Procter & Gamble could go for. Colgate-Palmolive's (CL) got a rich stock; it could trawl for a bid. Kimberly-Clark (KMB) is spinning off its healthcare business, but it needs to grow -- and grow fast -- to maintain its price-to-earnings (PE) multiple. Pepsico (PEP) and Mondelez (MDLZ) are being pressed to find more growth or split into companies that can grow separately. Surely Coca-Cola (KO) has to do something, anything, to restore its growth luster.
The supermarket is a vicious place right now. The center of the store has no real growth. Anyone one who sells into it except for the biggest of the big, such as Procter & Gamble, Colgate and Unilever -- could be a target. In the 1980s, I thought that after the first couple of bids, the stocks had all moved up too much. But what I failed to take into account was that each time a buyer made a bid, the buyer's stock went up, too. As long as the acquirer's stock keeps rallying, there will be more bids. In the meantime, many of these companies have above-average yields. I regard that as the protection you need to speculate in this industry now that Treasury yields have fallen to unfathomably low levels.
We know from the 1980s that once the fever's caught, it doesn't end until there are far more deals than you ever dreamed about. Many of them come from companies you never thought would get involved -- including foreign companies that are desperate to get into our markets.
Just keep this Hillshire Brands stock price in mind. It had done little since the breakup of Sara Lee. Then two bidders come along and it turns out the stock was worth far more than we thought.
The same could happen to all of these other companies except for the biggest players of all. It's not too late to place your bets. When you consider the yields and the fact that these stocks stopped going down on bad quarters more than a year ago, you have some much easier pickings than we thought possible even just five months ago.
