Where and what will Heinz acquire?
- May 29, 2008
||deal origination in May 2008
||tips include Kikkoman, Bertolli, Orkla CEE, Uncle Benâs, Mead Johnson Nutritionals, Nutritek
||sauces and condiments, meals and snacks, infant feeding
||HJ Heinz Company (USA), multinational food business
||growth acceleration, strategic fit, opportunism
||acceptable valuation, focus on core business
||Heinzâs core strategy is to grow through innovation and marketing, rather than acquisition
Heinz recently announced an increase in its earnings forecast for 2009-10, on the back of higher than expected growth in sales and operating profit in 2008. Itâs well known that Heinz is looking for acquisitions, around the world, and a significant deal is long overdue. Given Heinzâs culture of financial short âtermism, decentralization and opportunism, itâs unlikely to conclude a carefully planned mega âmerger. More likely theyâll try to pick up brands that are very profitable, but modestly priced because the seller is either distressed or exiting for strategic reasons.
Heinz boasts that its top 15 brands generate two âthirds of its sales revenue; but 15 brands is quite a lot, and suggests that strong brands might be a key acquisition criterion. The next question is strategic fit. Heinz is broadly in three business areas â sauces and condiments, meals and snacks, infant feeding. Candidates can be found in each category, but we think the first one is the most likely.
As weâve repeatedly commented at Glenboden, there are currently plenty of acquisition opportunities in the meals and snacks area worldwide. If weâre talking tinned soups, chilled snacks and frozen food, then materials costs are intrinsically high and the margins are suffering from the high commodity cost environment. Candidates identified by Glenboden in recent months include Unileverâs Bertolli (olive oil, balsamic vinegar, Mediterranean snacking); Orklaâs Kotlin (Poland) and Romanian business; Marsâ Uncle Benâs (more likely to be bought by Campbell Soup in our view). However, even if the valuations are attractive, the margins will not enhance Heinzâs key operating profit number.
Infant feeding, ranging from straight baby food to sophisticated nutrition formulas, is a more likely acquisition territory for Heinz now. The group was apparently in the race to buy Gerber last year, to add that brandâs 80% share of the US baby food business to Heinzâs strong European counterpart (Plasmon, Farleyâs etc). At the end of last year, Heinz was also rumoured to be interested in acquiring Mead Johnson Nutritionals, the no.2 infant formulas player in the US. However, our conclusion was, and still is, that MJN is too close to being a pharma business, and so would be too transformational for Heinzâs business model in key areas like R&D, marketing and sales channels. Other options include Russian players Nutritek (also covered in this monthâs Glenboden) and Lebedyanskyâs baby food business which recently attracted a financial investor.
However, the key problem is that infant feeding companiesâ valuations are very high at the moment, possibly too high for a thrifty buyer like Heinz. Remember that Nestle paid an EBITDA multiple of nearly x20 for Gerber, which is a traditional baby food business.
That leaves the cold sauces and condiments business. Margins are generally high in these categories, and brand equity often very strong. Maybe something with ethnic authenticity, but with global appeal, and as far away from ketchup as possible. A classic contender is soy sauce, in its own right but also because of its ability to drive a whole oriental range. Heinz already has ABC in its portfolio, Indonesiaâs no.1 soy sauce brand, which it acquired in 1999. Maybe itâs time for something with a global footprint. A favourite here is Kikkoman; very authentically Japanese, market leader in the US and enjoying double âdigit growth in Europe, and also part of an underperforming public corporation.
Knowing Heinz, however, the next acquisition they make will be a surprise, driven by opportunism. Remember that the groupâs last purchase, covered by Glenboden, was that of Cottee & Rose in Australia, from Cadbury a year ago. Thatâs a jam brand, which is hardly at Heinzâs strategic core.