Glenboden M & A Originations

Who else might be on 3G's acquisition radar ?

Priority Rating priority rating 4
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Origination Status takeover speculation, January 2014
Asset candidates include Pepsico, Campbell's, Kellogg's, General Mills
Buyer 3G (Brazil), leading investment management firm in Latin America
Seller public shareholders of takeover candidates
Buyer Rationale growth through acquisition on basis of Heinz platform
Seller Rationale attractive valuation
NBs since acquiring Heinz in 2013, 3G has increased earnings but the top -line has been flat
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Given 3G's industry focus, the background of of partners and its track -record, the group's next big takeover target is almost certainly a legacy branded business in the FMCG world. But who other than Pepsico and Campbell's could or should be on that big -ticket target list ? We tip Kellogg's and, lower -hanging in terms of rationale, General Mills.

General hunting -ground of Heinz adjacency ...Looking in particular at deal track-record (Burger King in 2010, HJ Heinz in 2013), but also taking into account the group's partners' profiles, 3G's next acquisition target will include a strong, house-hold name brand, in developed world in food & beverage, foodservice or retail.

We can also be sure that, given 3G's track-record of public-to-private deals, the target will be a big public company, with a large free -float, rather than a privately -held one.

We can exclude foodservice and retail, because we learn both from general sources and from discussions with insiders, that 3G wants to treat Heinz as a platform for acquisitions in adjacent, grocery food categories, above all in the US.

... plus investment rationale of cost cutting ...The key question is, what was the investment rationale behind the HJ Heinz acquisition ? Understanding that will take us a long way to unlocking the case for who might be next on 3G's acquisition trajectory, in US branded grocery foods.

Heinz was a decentralised business. Too many factories (upwards of 20 in Europe, to the constant chagrin of senior management); too many brands (as many as 15 power brands accounting for only two-thirds of the group's sales). So, it was a clear candidate for streamlining, rationalising, centralising.

Now, one year after the acquisition, 3G's 'restructuring and productivity initiatives' are already bearing fruit, with adjusted EBITDA up by 30% in Q3 2014 compared with prior year. Functions have been centralised or regionalised, product lines have been terminated, three factories have been closed.

... but focus now must be on growth through acquisitionAlthough the group's EBITDA increased in Q3 2014, for the first time in several years Heinz's top-line failed to grow in that period, and in fact volumes declined. It's hard to see how that will be reversed, organically, given that 3G's model includes reducing costs in commercial functions, and centralising marketing across broader geographies.

If Heinz doesn't start to grow again, then it risks milking itself to death over time. That's a classic scenario of a group that needs to grow through acquisition of businesses in overlapping or adjacent product categories and geographies.

Pepsico and Campbell's have already been rumoured as takeover targets; but who else could or should be on the list ? We would contend that Kellogg's, and in particular General Mills, both meet the investment criteria and acquisition trajectory that's been outlined above.

Kellogg's according to insiders ...We admit that Kellogg's candidacy was mentioned to us by a source very close to Heinz (one of the victims of 3G's restructuring there). However looking at Kellogg's recent financial performance, it's not difficult to see why that group should be on the radar.

In both Q3 and YTD 2014, the group's top-line and underlying operating profit are both slightly negative compared with the prior year. Indeed, underlying operating profit in particular has been almost stagnant over the last five years. Kellogg's portfolio is also very much adjacent to Heinz in terms of shelf -space (morning foods, snacks).

On the other hand, the group's decline has been mostly due to problems in the highly competitive north American market. Elsewhere things are more positive; in Q3 2014, Kellogg's reported earnings growth in Europe, Asia Pacific and especially Latin America (up by 20%). Kellogg's also has a relatively focused portfolio and brand structure, which limits the opportunity for rationalisation.

Overall therefore, although Kellogg's ticks some of the boxes as a takeover candidate for 3G, there is we believe a lower -hanging behemoth in the same space, that we would tip more (if 3G can raise the capital).

... but General Mills ticks more of the boxesGeneral Mills, the third -largest consumer foods group in the US, booked flat sales and declining earnings numbers in Q2 2015. In that context, a corporate restructuring has been announced that aims to axe up to 800 jobs in 2015.

There's a lot to streamline, rationalise and centralise. For a start, the group has about 40 production locations in the USA alone. As for portfolio, GM has no single flagship brand, like Heinz or Kellogg's do; but with a vast portfolio of over 40 brands, there's huge potential for brand migration and consolidation in its various business segments, with attendant savings in marketing costs etc.

Should GM's shareholders entrust the restructuring plan to encumbent management, or is there more value -creation certainty in merging with a Heinz that has over a year of successful restructuring to its credit, as well as bringing all the goodies of cost synergies and portfolio adjacencies ?

Our valuation for GM comes in at slightly below the Heinz number, from an EV /EBITDA perspective (see valuation), because GM does not have quite the brand equity that Heinz does, in our view.

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THIS LEAD'S VALUATION
Size (€ mln) 36.000
Sector grocery products
Asset Quality US no.3 group branded
Seller large plc
Buyer private equity
P/S 2,4
P/Ebitda 12,0
Type enterprise value estimate
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