These Companies Could Be Takeover Targets

Its deal time on Wall Street, Fools. In the two months ended Jan. 29, the dollar value of M&A activity was up roughly 23% compared with the year-ago period. And with experts predicting that dealmaking will remain strong, investors could see some exciting action in their favorite stocks.

Everyone and their neighbor has eyes on the cash-rich tech sector, where Apple (NYSE: AAPL  ) and Google (NYSE: GOOG  ) have both recently picked up smaller companies. Meanwhile, Yara International's recently announced all-cash purchase of fertilizer maker Terra Industries (NYSE: TRA  ) has commodity investors abuzz.

But a historically mundane sector is also ripe for continued M&A action: consumer staples.

Bagging growth
True, this sector generally lacks the cash-bloated balance sheets of large-cap tech and pharma. But staples companies are known for their stable cash flows and steady share prices, which means that the big boys of the sector can raise funds by issuing shares or low-rate debt. Case in point: Kraft's (NYSE: KFT  ) soon-to-close acquisition of Cadbury, at a deal value that's nearly half Kraft's market cap.

As tight-fisted consumers continue to think twice about brand names, larger, more mature companies are seeking growth wherever they can find it. And the reality is that savvy marketing and improved operating efficiency may not be enough to satisfactorily restore profits. That brings strategic acquisitions into the foreground.

Broadly speaking, acquirers are likely to pursue deals that'll either enhance their emerging-markets footprint or their exposure to faster-growing product categories. Below, I've highlighted two companies that fit the latter profile, yet remain within the bounds of a digestible enterprise value.

Company

Enterprise Value

Share Price
at Close of FY08

Current Share Price

FY08 / TTM EBITDA

Hain Celestial (Nasdaq: HAIN  )

$856.3 million

$23.48

$15.87

$107.5 million / $79.4 million

General Mills (NYSE: GIS  )

$29.8 billion

$58.03

$72.01

$2.7 billion / $3.3 billion

Data from Capital IQ and Yahoo! Finance on March 1. TTM = trailing 12 months.

Natural- and organic-foods specialist Hain Celestial appears to have had a tough time recently, although with shares sharply lower, its appeal as an acquisition target may have simultaneously risen. As for General Mills, strong performance through a recession is mighty appetizing.

Below, I've listed two companies that most closely fit the profile of potential acquirer.

Company

Market Cap

Total Debt

Interest Coverage

Unilever (NYSE: UL  )

$82.8 billion

$13.5 billion

11.4

Nestle

$180.0 billion

$22.5 billion

17.7

Data from Capital IQ on Feb. 26.

Now, let's dive into the rationale of possible deals.

General, meet the commander in chief
Does Unilever have the heft to launch a bid for General Mills? Sure. But management has more than once suggested that future acquisitions will be limited in size to 1 billion-2 billion euros.

That leaves Nestle, the world's largest food and beverage company. Although Nestle is already cozy with General Mills through a long-running international joint venture, the logic of a corporate marriage extends well beyond existing friendship.

In a nutshell, General Mills' product portfolio is a near-perfect fit with Nestle's core growth drivers. Along the line of health and nutrition, General Mills has steadily improved the nutritional profile of its products during the past several years. Consumers are digging the advances -- Fiber One granola bars and Yoplait Light yogurt, to name just two examples, have recently posted double-digit sales growth. In emerging markets, the company has made strong inroads to China with its Wanchai Ferry brand.

Meanwhile, General Mills' Foodservice & Bakeries business, which involves sales to convenience stores and restaurants, has outperformed relative to industry headwinds. Furthermore, the General's line of organic foods -- including Cascadian Farm and the recently acquired Larabar brand -- matches Nestle's fourth and final growth platform, premium-quality products.

Granted, General Mills would increase Nestle's exposure to the more mature North American market, but Nestle has already demonstrated that it's happy to grab an extra slice of this geography depending on product category. Observe, for instance, its recent purchase of Kraft's rapidly growing frozen pizza line.

In U.S. dollar terms, Nestle recently announced an approximately $9.2 billion share buyback. Assuming that the program is funded by the pending $28 billion all-cash sale of its Alcon stake, management would still have roughly $18 billion to play with. Now, that's likely not even half of what it would need to launch a bid for General Mills, but a combination of debt and a U-turn on the buyback could potentially make up the rest.

Earlier in the year, The Wall Street Journal laid the groundwork for a potential Nestle-General Mills hookup. What it failed to mention, however, is that such a deal would have to be consensual: The companies' joint venture agreement includes a mutually inclusive antitakeover provision, which can be modified only by consent of both parties.

Would General Mills be interested in selling itself? Probably not -- it's doing quite well on its own. But if Nestle were to propose an all-cash deal at a rich premium, we could see the general gladly take marching orders.

Additional speed dating
Although Hain Celestial's most recent quarterly sales slipped 3.5%, earnings per share were up 35%, accompanied by positive free cash flow momentum. Moreover, even if the organic-foods industry doesn't recapture its historical double-digit growth rate, I believe these niche products will easily outperform the grocery mass market.

Well within Unilever's acquisition-related financial parameters, Hain Celestial would be a valuable addition to the food, household, and personal care giant's portfolio. In particular, I see cost-saving opportunities in frozen foods and teas, not to mention improved bargaining power with retailers.

Finally, I previously identified Sara Lee as a plausible addition to a larger competitor. Barron's has since profiled the company's tasty takeover traits. I suggest that investors continue to keep their eyes peeled in this direction.  

Ultimately, there's no way to know what will happen in the M&A world. However, if you can convincingly argue a company's takeover candidacy, that might be good reason to pick up a few of its shares for your own portfolio.

Google is a Motley Fool Rule Breakers recommendation. Apple is a Motley Fool Stock Advisor choice. Unilever is a Motley Fool Global Gains recommendation. Unilever is a Motley Fool Income Investor pick. Try any of our Foolish newsletters, free for 30 days.

Fool contributor Mike Pienciak owns shares of Google but holds no financial interest in any other company mentioned in this article. The Fool has a disclosure policy.


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