General Mills Inc. doesn’t have to worry about 3G Capital and Warren Buffett taking a run at it anytime soon, analysts say. The long term is another story.
Consolidation rumblings in the food industry will intensify after the megadeal announced Wednesday that coupled Kraft Foods with H.J. Heinz, creating a company with $28 billion in revenue. Heinz shareholders will own 51 percent; Kraft 49 percent.
The power brokers in this deal are Brazilian private equity outfit 3G Capital and Buffett’s Berkshire Hathaway, which teamed up to buy Heinz in early 2013. With the packaged-food industry stagnating, analysts have been anticipating another move by 3G and Buffett.
“There’s been speculation for months, what food company could be next?” said Erin Lash, an equity analyst at Morningstar Inc. Kellogg, Campbell’s and Kraft were seen as the most likely targets, but Golden Valley-based General Mills’ name had surfaced in the rumor mill, too.
Investors Wednesday saw potential for more deals. On a bad day for the stock market — the Dow Jones index sank almost 300 points — shares of packaged-food companies popped on news of the Heinz-Kraft combination. General Mills closed at $53.74, up 54 cents, while Austin, Minn.-based Hormel Foods Corp. rose 21 cents to $56.66.
General Mills and many other packaged-food companies have watched their sales slow or even decline the past few years, pressuring profits. Consumers are changing their tastes, moving away from processed food. Meanwhile, a weak economic recovery has crimped the spending power of middle and lower-income consumers.
It’s the kind of atmosphere that can breed corporate combinations. “Given ongoing weakness in U.S. food and the fact the sector is still vastly fragmented, a merger between Heinz and Kraft opens the door to further consolidation,” Alexia Howard, a stock analyst at Bernstein Research wrote in a report.
With about $18 billion in annual revenue, General Mills is one of the nation’s largest packaged-food companies and has a stock market value of about $32 billion. Any successful bid for General Mills would be at a premium to its market capitalization, maybe around $40 billion, said Jack Russo, an analyst at Edward Jones. The Kraft deal is valued at $46 billion. That’s no chump change, even for big dealmakers.
3G will be busy for a couple of years executing the Heinz-Kraft combo, including cutting $1.5 billion in annual costs. “I don’t think Warren Buffett and 3G will be able to come back to this industry in some time,” Russo said.
Still, 3G and Buffett have deep pockets. And Bernstein Research’s Howard doesn’t count out a such deal in the longer term. “A merger of Heinz and Kraft with General Mills several years down the line could make sense” given the two companies geographic overlap and the high market share of their brands, she wrote.
In the shorter term, other “financial” buyers — investors like 3G and Berkshire Hathaway — could target the packaged-food industry. And there’s always the possibility of “strategic” deals between rival foodmakers.
Swiss food and consumer products giant Nestlé would have the financial heft to buy General Mills, and there’s long been speculation that Nestlé might make such a play. The two companies know each other well.
Still, Nestlé has targeted its acquisition dollars at the health industry, not packaged food, in recent years, said Morningstar’s Lash.
As for Hormel, with a $14 billion market capitalization, it’s a smaller, more digestible company than General Mills. But its ownership structure — the charitable Hormel Foundation is a large shareholder — would complicate any deal.