Global food giants face consolidation

Rumours of a mass gathering of investment analysts in a country estate in Ireland have fuelled speculation that its owner, HJ Heinz chairman Tony O’Reilly, is in serious talks with another food company.

Reports that Bestfoods, which owns Hellmann’s mayonnaise and Knorr, was the target of Heinz’s ambitious chief executive William Johnson have since been denied.

Bestfoods, a company which normally refuses to comment on market activity, was quick to issue a denial last week, saying that “no significant acquisition or combination discussions are in progress”.

It is understood analysts at the meeting in Ireland were told that an announcement was expected within weeks.

The move is likely to spark an intensive period of consolidation and divestment in the global food manufacturing industry, involving many of the world’s top brands. This week, for instance, US food and tobacco giant William Morris is reported to be considering selling its Jacobs Suchard confectionery business for an estimated $10bn (£5.9bn).

City analysts are divided on whether Heinz would benefit from a deal with Bestfoods. The merger would create the second largest food manufacturer in the US.

One UK analyst comments: “Out of the US food companies, Bestfoods has the strongest position in emerging markets. That’s why Heinz is knocking on its door.

“Most US food companies have not invested heavily in developing markets. Consequently, they have little potential for topline organic growth, unlike businesses such as Nestlé.”

Bestfoods recorded sales of $8.4bn (£5.3bn) for 1988: 42 per cent derived from Europe, 41 per cent from North America, 13 per cent Latin America and four per cent Asia. In comparison Heinz notched up sales of $9.3bn (£5.8bn) for 1999. The majority of its sales – 55 per cent – came from North America, with 26 per cent from Europe, 11 per cent Asia/Pacific and eight per cent other regions. Other US food companies, such as Kellogg and Campbell’s, are even more dependent on sales in their domestic market.

Another UK analyst claims that product synergy between Heinz and Bestfoods is limited, despite the geographical advantages.

He says: “The overlap of product categories such as soups and sauces is not a significant part of its {Heinz} business.”

Ketchups, sauces and condiments make up 24 per cent of Heinz sales, with 15 per cent coming from frozen foods, 12 per cent tuna and 49 per cent other sectors, including petfoods.

The analyst also points to the fact that mergers between companies of a comparable size tend not to be successful in producing the necessary rise in profits.

And this will be even more difficult to achieve in a climate where poor results across the US food industry are forcing manufacturers to re-examine their structure and make savings.

In the past, US food manufacturers were able to increase revenues by boosting prices. But consolidation in the retail market has fuelled the rise of own-label products, which in turn has forced the manufacturers to keep prices low. Ten supermarket chains now control 52.1 per cent of US grocery sales, compared with 28.4 per cent in 1987.

One food analyst says: “In the US, food companies have benefited from a fragmented retail business. But as consolidation gathers pace, they are rethinking their strategies.”

Many food manufacturers are being forced to contemplate defensive mergers, to ensure their products are stocked in this decreasing pool of retailers.

The analyst comments: “US food companies have only just realised that the way forward is to own the number one and two brands in a particular category.”

It is this realisation that the US grocery retailers are heading in the same direction as their European counterparts, combined with poor results among manufacturers, that has fuelled merger speculation.

US analysts have been busy drawing up hypothetical models for mergers, which include possible combinations of General Mills and Quaker Oats and Kellogg with either Keebler Foods or Nabisco Holdings, as well as Bestfoods and Heinz.

Even if the latter deal does not go ahead, there are sure to be other food manufacturers circling Bestfoods.

Paul Walton, chairman of brand strategy consultancy The Value Engineers, says: “Bestfoods has an excellent portfolio and solid brands in Hellmann’s and Knorr.

“Led by chief executive CR ‘Dick’ Shoemate it has been highly successful in making acquisitions, such as Pot Noodles, and developing instant meals.”

From a category management perspective, Walton believes that a merger involving Hellmann’s and Heinz salad cream brands would make sense.

In addition, Heinz’s dependence on tomato-based food products – soups, pasta, baked beans and ketchup – would also provide cost-savings with Bestfoods own range of Knorr soups and food brands such as Napolina.

Walton adds: “A merger would make a fantastic food service proposition, with portion packs of Hellmann’s mayonnaise, Heinz ketchup and salad cream being ensured a place at the table, as well as being used as sandwich finishers at most food service outlets.

“These are middle-ground companies, in an age of consolidation they must link with other businesses to acquire critical mass, and innovate to be competitive.”

Andrew Seth, chairman of the board of Added Value, agrees that retail consolidation is forcing US food companies to consider mergers.

As for a possible deal between Heinz and Bestfoods, he says: “They will achieve great synergy. They have both got one or two powerful brands – it’s a very rational proposition.

“O’Reilly cut costs at Heinz for a number of years, but eventually that strategy loses steam and the company has to look elsewhere for growth.”

With US food manufacturers under increasing pressure to boost profits in the rapidly consolidating retail sector, last month’s gather ing of analysts in Ireland could trigger many similar meetings across the US.