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Food giants set their sights on organic, natural companies

July 11, 2016
Consumer Packaged Goods

Danone SA’s $10.4 billion takeover of WhiteWave Foods Co. is the latest in a flurry of food industry deals born out of pressure that longtime supermarket standbys face to adapt to changes in consumer eating habits.

Food giants that have struggled to turn around stagnating sales are targeting smaller companies that have tapped into consumers’ growing desire for simpler, more natural products.

Surging sales of products like WhiteWave’s Silk soy and almond beverages and Horizon organic milk have helped more than triple the Denver company’s shares since its $17 a share initial public offering in 2012.

“The reality has changed on the shelf. Looking at organic and non-GMO [products], they are now much faster-growing than conventional” items, said Danone Chief Executive Emmanuel Faber on a conference call about the deal on Thursday. He said the sales of those products are growing around three times as fast as their conventional counterparts and are no longer niche.

Hormel Foods Corp. made what it said was its largest ever acquisition last summer when the company paid $775 million for organic-meats company Applegate Farms LLC and the year before General Mills Inc. paid $820 million for Annie’s Inc., known for its organic macaroni and cheese, in moves that catered to the growing population of health-driven customers.

The explosion of food merger and acquisition activity last year led to more than $116 billion worth of deals involving U.S. companies, the largest total dollar amount in at least two decades, according to data from Dealogic.

So far this year, food and beverage deals valued at more than $43 billion have been disclosed. The total is lower than the $74 billion worth of deals during the same period in 2015 but is still the second highest overall since 2008, according to Dealogic. The drop in deals this year is partly due to tighter credit conditions and lower valuations of companies, according to a recent report by advisers A.T. Kearney Inc.

The French dairy giant’s purchase of WhiteWave pushed up stock prices of other food companies that focus on organic or fresh foods.

Shares in Hain Celestial Group Inc., which sells herbal teas and vegetarian snacks, were up 3.5% on Friday after gaining 7% a day earlier, while Skinny Pop popcorn maker Amplify Snack Brands Inc.’s shares rose 5.4%. Similarly, Lifeway Foods Inc., which makes kefir, and Snyder’s-Lance Inc., which sells nuts and seeds, both jumped in the past two days. Analysts and bankers say that small food companies can offer higher returns for investors in a time of sluggish growth in the broader U.S. economy.

Sales of natural and organic products can grow at an annual pace in the high-single or low-double digits, said Sean Naughton, senior research analyst for Piper Jaffray Cos.

“It is economics—the bigger the ship, the harder it gets to turn,” said Jeff Tarplin, managing partner at India Brook Partners, an investment banking firm that specializes in food-industry mergers and acquisitions.

Consumers’ appetite for healthier and more natural food also has hurt companies that sell sweets and has sent a few companies in search of deals that help them reduce overall costs.

Last week, snack-maker Mondelez International Inc. made a $23 billion bid—quickly rebuffed—for chocolate company Hershey Co. in a combination that would create the world’s largest candy maker.

Consolidation can come at a cost. Under behemoth Kellogg Co., 2014 sales at cereal-maker Kashi slipped to $500 million, 17% below their peak. Kellogg imposed elements of its corporate structure on the company and the changes ended up turning off employees and consumers.

Some companies like Clif Bar & Co. and Kind LLC have resisted bids by larger food companies. Kind CEO Daniel Lubetzky said his company would remain private for financial reasons and to carry out its social mission.

WhiteWave has flourished in the three years since striking out on its own after parent Dean Foods Co. spun off the faster-growing soy milk maker from its stagnant commodity dairy business.

Dean Foods continues to struggle with a decadeslong decline in milk drinking in the U.S., while WhiteWave sales have ballooned thanks in part the purchase of nutrition food companies Vega and Wallaby Yogurt Co. in 2015. Its organic sales—excluding acquisitions—also have grown in the double-digits on average, according to the company.

Still, “at some point it’s going to become very difficult to make an acquisition just to show growth” in sales, said Chris Geier, head of investment banking at Chicago-based accounting and advisory firm Sikich LLP.

By Kelsey Gee and Heather Haddon

Source: Wall Street Journal

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