Boca Raton, Fla. Feb 23 - Food companies are pushing away from the acquisitions table in the face of the weak global economy, and those that do seek deals are likely to focus on bite-sized morsels.
Several factors weigh against a large number of food deals in 2009, industry executives and analysts told Reuters at the Consumer Analysts Group of New York conference this week in Florida.
Companies are being cautious with cash in a recession and as credit markets remain tight. Also, fewer targets are available as private equity investors hold on to reap a better return on businesses they bought in recent years.
At the same time, more executives see the value of focusing on a few categories where they can perform well, rather than making huge deals that add scale but take away from focus.
"I think you'll see the whole M&A environment change dramatically over the next year," H.J. Heinz Co CEO William Johnson said in an interview.
"I don't think there's going to be a lot of aggressive solicitation of deals," he said. "I do think you'll see some activity, but I don't think it's going to be a priority for a lot of people."
In 2008, there were 171 deals involving U.S. food and beverage sector targets, down from 209 in 2007 and 216 in 2006, according to Thomson Reuters. But the total value of the deals was about $104 billion in 2008, up from nearly $93 billion in 2007.
Several executives at the conference said they were focused on conserving cash this year.
"If you see M&A, I think it's going to be the small, bolt-on M&A," Morningstar analyst Erin Swanson said. "I don't think it's going to be the strategic, game-changing M&A at this point, just because I think these companies at this point are focused on maintaining financial flexibility."
AFRAID OF INDIGESTION
Most food companies have been hesitant to make large acquisitions in recent years after seeing rivals' trouble in digesting megadeals of their own.
Unilever PLC's difficulties in integrating the $21.3 billion acquisition of Bestfoods it made in 2000 and General Mills Inc's initial problems absorbing the Pillsbury foods business it purchased for $10.4 billion a year later are two of the deals analysts mention when they talk about why companies are skittish.
"Everyone has talked to each other in the past and everyone knows each others' portfolios," said a consumer investment banker who declined to be identified by name. "It's just a slow-moving industry where transformational deals don't happen that often."
That is not to say that M&A is completely off the table.
"We have a balance sheet and we're not afraid to use it," Campbell Soup CEO Douglas Conant told Reuters.
But he says potential targets are currently "locked up," either by private equity investors who bought them in the past few years and are not quite ready to sell them, or in the portfolios of other food companies that would have a difficult time selling the assets Campbell wants individually.
"There's evidence that there will be some good values coming free within the next year or two," he said. He did not name specific targets.
Conant also knocked down the likelihood of one major deal that is often the subject of speculation by analysts: a tie-up of Campbell and Heinz.
He said Campbell has "no interest" when asked about merging with Heinz to become a much larger company.
"All the large food companies right now are struggling under the weight of their huge portfolios," Conant said.
Johnson also downplayed the likelihood of such a deal. In answer to a shareholder's question at the company's annual meeting last year, Johnson said Campbell would be a "good fit."
But this week, Johnson called the comment "ancient history" and said he was just trying to give an honest answer to a shareholder and did not mean to imply anything more.