Top Food and Beverage Companies for 2009: Licking the Recession

With its December 2007 acquisition of FPI Ltd., High Liner Foods. doubled in size and bows this year at No. 97.

Acquisitions Slowed in 2008

Source: The Food Institute The full report, “Food Business Mergers & Acquisitions 2008,” can be previewed and bought from the Food Institute at www.foodinstitute.com/manda.cfm.

To no one’s surprise – and following two consecutive years of growth -- merger and acquisition activity in the food industry declined approximately 8.5 percent in 2008, with 35 fewer mergers completed last year than in 2007, according to the Food Institute.

However, activity by true food processors actually increased by a third, to at least a six-year high of 129 deals, with 11 more announced but not completed by year end. The Food Institute defines the food industry broadly, including in its analysis agricultural cooperatives, packaging and equipment suppliers, restaurants, retailers and other categories. In 2008, as in most years, food processors were the busiest.

Within the food processor category, multi-product companies effected the most mergers and acquisitions (also an annual leader), totaling 30, followed by brewers/distillers/wineries with 11 deals and meat companies with 10.

There was a sharp drop in investment firms and banks buying food companies, also probably no surprise given their instability, the global recession and the tightness of credit.

“It is difficult to estimate how much the severe global financial troubles affected the merger and acquisition activity within the food industry in 2008, particularly because the floor did not drop until the fourth quarter of the year,” said the report. “Also … many deals were already in the works prior to November, and to cancel any deals may have resulted in substantial monetary penalties.

“Skyrocketing commodity costs also may have contributed to apprehension on the part of purchasers involved with food industry merger and acquisition activity. Though it is impossible to clearly draw connections between the economic turmoil of 2008 and its effects, it is evident that investment firms and banks, which cast a large shadow on the food industry in 2007, exhibited a diminished presence in 2008,” according to the report.

Among food processors’ subcategories, four engaged in fewer deals in 2008 than in the previous year: dairy, multi-product, poultry and snack food segments.

Bakery activity was up significantly. One of the year’s biggest deals involved the sale of a George Weston Ltd. subsidiary’s U.S. fresh bread and baked goods business to Mexico-based Grupo Bimbo, one of the world's largest baking companies. The deal was made for gross and net cash proceeds of approximately $2.5 billion. The assets include the Arnold, Brownberry, Entenmann's, Freihofer, Stroehmann and Thomas' brand names. Flowers Foods also made two acquisitions, Butterkrust Bakery Inc. and Holsum Bakery Inc.

But the biggest deals of the year involved brewers. Global but Belgium-based InBev bought Anheuser-Busch Cos. For a whopping $52 billion. The combined company was renamed Anheuser-Busch InBev and is the world’s largest beer company, passing SABMiller.

In order to better challenge Anheuser-Busch InBev on American soil, SABMiller PLC and Molson Coors Brewing Co. – themselves both recently merged companies -- on June 30, 2008 created joint venture MillerCoors, combining America’s No. 2 and 3 brands.

For confectioners, 2008 was the second year of M&A growth, with two more deals completed than 2007’s five. The most noteworthy was Mars Inc.’s foray into the chewing gum category with the $23 billion buy of Wm. Wrigley Jr. Co. -- the second most expensive single deal listed in 2008. Wrigley will retained its Chicago headquarters and will operate as a separate business segment, alongside the existing Mars’ business units of chocolate, pet care, food, drinks and symbioscience.
Also of note in the category was the closing of the sale of Godiva Chocolatier Inc. by Campbell Soup Co. to Yildiz Holding A.S. of Israel. The deal, which was announced in 2007 but not completed until last year, was for $850 million.

Other notable deals:

• JBS S.A. bought Smithfield Beef Group.
• J.M. Smucker Co. bought the Folgers coffee business from Procter & Gamble.
• Ralcorp bought the Post cereals business from Kraft.

In the Dairy segment, mergers and acquisitions activity was more in line with 2006 and 2005 totals, totaling seven completed compared with 2007’s 11 mergers. Agropur made some noise in 2008, acquiring Trega Foods and Schroeder Milk, after remaining quiet in the U.S. market and making only one other deal since 2002. Cal Maine Foods, the largest producer and distributor of fresh shell eggs in the U.S., also made news by acquiring the majority of the assets of Zephyr Egg Company and increasing its stock with approximately two million laying hens in modern, in-line facilities.

Top-Line Growth, Bottom-Line Erosion

Most food and beverage manufacturers were glad to bid farewell and good riddance to 2008. Increases in fuel and commodity prices wreaked havoc on profit margins during the year. Because of general declines in consumer demand, most manufacturers were not able to pass these increases on in the form of price increases.

While in many cases, top line revenues increased, profits [as a percent of revenue] declined almost across the board. As commodity prices increased during the early part of 2008, demand declined which ultimately brought commodity prices down during the latter part of 2008 giving many manufacturers a needed respite. This decrease in commodity prices has continued in 2009 along with sagging demand. If manufacturers can hang on to their top line revenue, 2009 might end up being a good year for them.

Generally, food & beverage companies have beaten the market over the past two years, with food companies down approximately 20 percent compared to the broader market being down 38 percent. Although many of the food companies in the survey experienced declines in their gross profit margins as a result of higher fuel and commodity prices, they fared much better than other industries, with most of the companies remaining profitable in a very tough economic environment.

For example, Kraft’s 2008 gross profit margin was approximately 33.2 percent compared to its five-year average gross profit margin of 34.9 percent. Tyson, which is still struggling with higher interest costs, had a gross profit margin of 4.6 percent compared to an average of 5.6 percent. PepsiCo’s 2008 margin was 52.9 percent compared to its five-year average of 54.9 percent. Smithfield Foods, which is struggling to stay in the black, had a gross profit margin of 5.1 percent compared to a five-year average of 9.9 percent. All of these companies experienced top-line growth and bottom-line declines.

The winners for 2008 were those companies that effectively addressed their internal cost structures and managed their commodity costs. For the companies that were successful in doing so, 2009 should be a very promising year with higher gross profit margins due to lower commodity and fuel costs. They should emerge from this economic downturn much more efficient enterprises. Those companies that are not successful in reducing costs or that entered this economic downturn with too much debt on the books may cease to exist or be taken over by more efficient enterprises.

Lean manufacturing principles also received a boost in 2008. More than half of all U.S. manufacturing plants have implemented lean principles, according to a survey of U.S. manufacturers. There is still room for improvement as many countries are not as far along as the U.S. in adopting lean. Most manufacturers are working hard to increase productivity measured by production per employee or sales per employee.

There are also many dangers on the horizon such as more regulation of the food supply expected in 2009 and the other governmental proposals such as health care reform. The added cost of compliance with new mandates may very well offset the lower commodity costs expected for 2009.

— By Dexter Manning, National food & beverage industry leader, Grant Thornton LLP

The Fruits and Vegetable food producer segment posted similar results to its 2007 totals, with one more completed acquisition this year. The deals made in the category were mostly made between fruit and vegetable processors such as the Taylor Fresh Foods and Foxy Foods’ fresh produce processing operations and the Driscoll’s Strawberry Associates shareholdings increase in Driscoll’s of Chile. Other notable deals included the J.R. Simplot Company purchase of retail agricultural business H & R Ag. Inc. and the acquisition of Sunrise Growers-Frozsun Foods by an affiliate of Sun Capital Partners, Inc.