The reported Mondelez (MDLZ) bid for Hershey (HSY) makes so much sense it's almost laughable it didn't happen before the Fed's first interest rate hike last year.
Hershey would give Mondelez a sizable presence in the still-lucrative U.S. candy aisles and also exposure to new, fast-growing snack brands such as Krave and Barkthins (Kraft has ventured into snacking category via a 2015 acquisition as well) that could compete with traditional snacks from a PepsiCo (PEP). Though Hershey's board has reportedly rejected the offer, a tie-up with Mondelez would give it the expertise and supply chain to improve its results overseas, which have underwhelmed (a mere 19% of Hershey's sales are derived internationally).
I think Hershey is gobbled up within the next 12 months (see original thesis here), but do not rule out Warren Buffett getting involved here. Remember, Buffett loves packaged food and has strong knowledge of the candy business (see See's Candy and his financing of Mars' $23 billion buyout of Wrigley back in 2008). Nevertheless, there are at least three factors underlying the need for big food to consolidate even if it means paying more than the already inflated trading multiples for many in the sector.
-- The great retail store expansion boom of the past 20 years is dying (except for dollar stores, which are feasting on shuttered real estate and growth in the poor), and going forward brands that sit on retailer shelves will need to find out how to improve the economics of each item they sell instead of relying on retail door expansion.
-- Corporate R&D teams must be enlarged in order to unearth the types of product innovation to entice on-the-go millennials and baby boomers who will increasingly look to snack over the next 25 years. Companies have to realize they must work together to solve new consumer needs instead of trying to out-innovate each other for a measly 0.1% increase in quarterly market share.
-- Raw materials such as sugar, fuel, cocoa beans -- all of these things are going to be in short supply due to expected global population growth. Sure, raw-materials prices may be volatile from day to day as a result of news of the day, but over time their direction is going to be higher. It's best for the shareholders of food companies if execs consolidate operations, improve their negotiating power with suppliers and be fully prepared to play in a much larger world.
I think other execs at big-name food companies sitting on the fence on whether to do a material deal should look to the Hershey news and realize it's time to act. A couple of deals that make sense:
General Mills Could Buy Hain Celestial
General Mills (GIS) did something interesting earlier this week in separating its growth businesses from its slower-growing businesses for reporting purposes. The company said it will allocate more resources behind organic and natural brands and faster-growing areas in cereal and snack bars. Although the company denied to me it's shopping slower-growing brands such as Progresso soup, I think the shift in reporting signals the company is looking to exit these brands while going on the hunt for new growth.
As I have stated in the past, Hain Celestial (HAIN) makes sense for General Mills -- it has a big portfolio of organic food brands, its stock has been crushed the past year (it's being mismanaged, in my opinion) and it could greatly use the operational expertise of the execs at General Mills.
Kraft Heinz Could Buy Campbell Soup
Kraft Heinz (KHC) has struck me as the ultimate consolidator in the food industry. Its portfolio now basically contains all sorts of products that don't necessarily make a ton of sense under the same umbrella (opposite Hershey and Mondelez). The company's single goal seems to be cost-cutting and cash flow generation. And given that, I think the company should add Campbell Soup (CPB) to its portfolio. While the soup business is far from high growth, it's a somewhat consistent cash cow. (PepsiCo and Kraft Heinz are part of TheStreet's Action Alerts PLUS portfolio.)
Besides that, Campbell's would give Kraft Heinz something it doesn't really have at the moment -- exposure to the health and wellness section in supermarkets via the Bolthouse Farms and Plum Organics brands.