There is overwhelming industrial logic to Unilever’s £11.6bn unsolicited offer for Bestfoods, its opposite number in the US. It is also reassuring to know that supposedly “old economy” stocks can still command healthy market premiums, without having to parade themselves as dot-coms or new-generational telecoms outfits.
Unilever co-chairman Niall FitzGerald said at the weekend that faint heart never won fair takeover battle and described Bestfoods as the “prettiest girl” on the dance-floor. FitzGerald may not be at the cutting-edge of gender politics, but he knows a thing or two about paying a fair price for a fair lady.
Unilever’s cash offer values Bestfoods at $66 (£41.25) per share, a stonking ten per cent premium over the target’s all-time high on Wall Street. With HJ Heinz returning to the table, having pulled out of earlier discussions with Bestfoods, and sniffing around at $72 (£45) per share, we can expect Unilever to tempt the apple of its eye with even more. Bestfoods won’t give up its independence until near on £14bn has been offered and Unilever has the capacity to go that far.
You can see why FitzGerald feels so randy. Bestfoods has a drop-dead-gorgeous brand portfolio, embracing Hellmann’s mayonnaise, Knorr soups, Pot Noodles and Marmite. There are global distributive synergies to die for and potential rationalisations that could save about £300m a year. Bestfoods has apparently grown at a compound rate of almost 19 per cent over the past five years.
My only question is why Unilever should have left it so long before marking Bestfoods’ card. FitzGerald may have cast himself as “he who dares to first put his foot on the dance floor”, but it has to be said that he has been a wallflower or missed entirely some of the balls at which Heinz has been asking Bestfoods to dance. Unilever has been eyeing up Bestfoods for the best part of 20 years.
But it’s better late than never. We should now witness a long heralded shake-up in global foods businesses, which have been ripe for consolidation for some time. This is all very top-of-the-market stuff – a point I shall return to later – but big deals have a habit of breeding, and this is the biggest food-industries play since Kohlberg Kravis Roberts (KKR) took out RJR Nabisco for $30.6bn (£19bn) in 1989.
All right, Grand Metropolitan acquired Guinness for £10bn in 1997, but that was really a drinks deal. The food industries have been ready for further barbarians at the gate for more than a decade, and conventional wisdom has it that we can anticipate some consolidation action now that will make Unilever’s initiative look like a high-school dance.
This process is reckoned to be all the more urgent for the fact that there are limited options for consolidation in the food industries at the level of the Unilever/Bestfoods proposition. Nabisco is once again on the market, having been separated from RJ Reynolds Tobacco, and Danone is known to be looking at that opportunity. That should keep Danone’s mouth full.
Elsewhere, tobacco giant Philip Morris was a major diversifier into foods when it acquired General Foods and Kraft in the late Eighties, but is too embroiled in tobacco class actions to be a major player on the required scale. NestlÃ©, the very largest of the foods behemoths, is keeping its own counsel on the subject of acquisitions.
Potential targets are not that easy to identify either. There are significant structural problems with many of the attractive companies in this sector. Campbell Soup, for example, is family-controlled. Pillsbury would have to be leveraged out of Diageo – not impossible, but not easy either. American cookie business Keebler has an unhappy history in and out of United Biscuits (UB) and is now majority-controlled by Flowers. UB itself became small-time after the heady years of expansion under chairman Hector Laing and was acquired by a consortium consisting of Nabisco, Dallas-based Hicks Muse and some venture capitalists.
It’s possible that the likes of Kellogg and Quaker Oats could be attractive growth opportunities, but the prospect hardly sets the world alight on the scale of a Unilever/Bestfoods deal. The bottom line here could be that the prospects for food-industries consolidation will come from complex break-ups of existing groups into more rational brand families.
The auction of Nabisco and the healthy interest it has attracted, the bid for Bestfoods at a full price and the fact that Heinz is at its shoulder to raise the stakes all demonstrate there is some buoyant corporate trading to be done. Although I wouldn’t anticipate a takeover frenzy of the kind we witnessed in the late Eighties, when GrandMet acquired Pillsbury, NestlÃ© took Rowntree, Philip Morris bought Kraft and KKR stormed RJR Nabisco, all within a year.
My final point, as promised, is about US stock-market overvaluation. In the medium term, say three to five years’ time, we can anticipate a hard landing for the US economy that has been artificially fuelled by retail-equities inflation. Deals done now, even in mature industries such as foods, may look very expensive by 2004/5. There is much to be sceptical about in some, but not all, of these deals.
George Pitcher is a partner of issue management consultancy Luther Pendragon