Glenboden M & A Originations

Where and what will Heinz acquire?

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Origination Status deal origination in May 2008
Asset tips include Kikkoman, Bertolli, Orkla CEE, Uncle Ben’s, Mead Johnson Nutritionals, Nutritek
Sector sauces and condiments, meals and snacks, infant feeding
Buyer HJ Heinz Company (USA), multinational food business
Buyer Rationale growth acceleration, strategic fit, opportunism
Seller Rationale acceptable valuation, focus on core business
NBs Heinz’s core strategy is to grow through innovation and marketing, rather than acquisition
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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. It’s well known that Heinz is looking for acquisitions, around the world, and a significant deal is long overdue. Given Heinz’s culture of financial short –termism, decentralization and opportunism, it’s unlikely to conclude a carefully planned mega –merger. More likely they’ll 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 –thirds 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 – 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 we’ve repeatedly commented at Glenboden, there are currently plenty of acquisition opportunities in the meals and snacks area worldwide. If we’re 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 Unilever’s Bertolli (olive oil, balsamic vinegar, Mediterranean snacking); Orkla’s Kotlin (Poland) and Romanian business; Mars’ Uncle Ben’s (more likely to be bought by Campbell Soup in our view). However, even if the valuations are attractive, the margins will not enhance Heinz’s 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 brand’s 80% share of the US baby food business to Heinz’s strong European counterpart (Plasmon, Farley’s 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 Heinz’s business model in key areas like R&D, marketing and sales channels. Other options include Russian players Nutritek (also covered in this month’s Glenboden) and Lebedyansky’s baby food business which recently attracted a financial investor.

However, the key problem is that infant feeding companies’ 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, Indonesia’s no.1 soy sauce brand, which it acquired in 1999. Maybe it’s time for something with a global footprint. A favourite here is Kikkoman; very authentically Japanese, market leader in the US and enjoying double –digit 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 group’s last purchase, covered by Glenboden, was that of Cottee & Rose in Australia, from Cadbury a year ago. That’s a jam brand, which is hardly at Heinz’s strategic core.

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