Chicago, Sept 8 - Kraft Foods Inc's Irene Rosenfeld argues that size matters, as she pushes forward with a $16.7 billion bid for British chocolate and chewing gum maker Cadbury PLC.
"We believe scale will be an increasing source of competitive advantage in both the confection category and the food industry at large," Rosenfeld told analysts on Tuesday as she tried to rally support for the bid, which Cadbury has rebuffed.
But analysts and investors question whether Kraft, the largest North American food company, automatically benefits from getting any bigger -- while at the same time thinking Kraft's bid could signal another wave of food consolidation.
"I think there is a tendency in any industry to confuse size with value," said Matthew Kaufler, portfolio manager of the Federated Clover Value Fund, which holds shares of Kraft and other food companies. "At what point does it become size for the sake of size?"
BENEFITS FOR KRAFT
Taken by itself, analysts see value in Kraft buying Cadbury. The deal would expand Kraft geographically, especially in the large India market, while Cadbury's portfolio would further diversify Kraft from more commoditized items like cheese that are subject to stiff private label competition.
"A successful acquisition would strengthen Kraft's portfolio in the relatively fast growth and high-margin confectionery category," J.P. Morgan analyst Terry Bivens said in a research note.
But other food companies, including H.J. Heinz Co, Campbell Soup Co, Kellogg Co and General Mills Inc, also saw their share rise on Tuesday on speculation that a new wave of consolidation in the food industry could be on the way.
Similar waves in the past have had mixed results, and food companies have shied away from huge acquisitions in recent years because of past hiccups.
Unilever Group's difficulty integrating its $21.3 billion acquisition of Bestfoods in 2000 and General Mills' initial problems absorbing the Pillsbury business it bought for $10.4 billion a year later are two deals analysts mention when they talk about why companies are skittish.
"Coming to market with a 'broad portfolio' unless it is a broad portfolio of category leaders ... I think you are fooling yourself to think that it really adds sway," Kaufler said.
The argument in favor of consolidation is that larger companies carry more clout with retailers, which have themselves consolidated. Also, cost-cutting opportunities can be greater at a time when margins have been under pressure, first from soaring commodity costs and then by a recession that has driven more consumers to seek lower-priced foods.
DANDY IN CANDY
In the case of the confectionery industry, Mars Inc's $23 billion acquisition of Wm Wrigley Jr Co last year also created a behemoth in the candy and chewing gum business to compete with companies like Cadbury and Hershey Co.
"The Wrigley-Mars deal totally changed the competitive landscape," Lee Linthicum, global packaged food research manager at Euromonitor International, said.
In fact, Hershey is being advised by U.S. bank JPMorgan on a possible strategy regarding Cadbury, a source familiar with the situation told Reuters on Tuesday, which indicates it could be considering a run for the chocolate maker. Hershey and JPMorgan declined to comment.
But retailers like Wal-Mart Stores Inc are less concerned about whether a company has scale all through the store and instead focus on companies that are the biggest or second-biggest in any one category.
Still, manufacturers are battling with retailers to hold onto recent price increases, and a case in Belgium earlier this year might have prompted manufacturers to look again at size as an asset.
In February, grocer Delhaize Group stopped stocking about 300 Unilever products in Belgium in a dispute over price and other issues. A survey showed Delhaize lost customers because of the decision. Unilever and the retailer settled the issues in March and Unilever returned to the shelves.
"It's indicative of how manufacturers can sort of reassert themselves," Linthicum said. "Of course, the bigger they are, the more they can reassert themselves."