Are There Gains to Be Had Beyond the Hillshire Brands Food Fight?

In the last week, two different companies went public with bids to acquire Hillshire Brands (NYSE: HSH) in offers that can only be to create operational synergies, boost manufacturing capacity, and increase supermarket shelf space. While the focus is on Hillshire and what company will have the winning bid, there are several other food companies that might also see merger and acquisition interest. These potential acquisition candidates include such names as WhiteWave Foods (NYSE: WWAV), Dean Foods (NYSE: DF), and Sanderson Farms, (NASDAQ: SAFM), all of which represent interesting prospects for different reasons. 

What's so interesting about Hillshire?
If we combine both bids for Hillshire Brands, the company has seen its stock soar 45% in the last week alone. This is a company that owns brands Jimmy Dean, Ball Park, Hillshire Farm, and Sara Lee, among others and is a key leader in meat processing.

Hillshire is not a company that's expected to grow organically to a large degree, as analysts expect revenue to increase 2.5% this year to $4 billion. Therefore, the upside in acquiring Hillshire must lie in synergies, and being able to boost its current operating margin of 9.4%.

The world's largest meatpacker and chicken producer are the two companies attempting to acquire Hillshire -- companies that already have large manufacturing scale. With 9,000 employees, Hillshire might be seen as a company that can be trimmed, or where existing factories can be made leaner and the supply chain made more efficient.

Are more acquisitions likely?
Regardless of the reason in acquiring Hillshire, it's obvious that more than one company sees value, and that bids are coming in quickly. This creates an interesting dilemma where large food companies with inside looks at the industry might seek to be more acquisitive, and given the speed of bids, such offers could happen fast.

One of the confusing facts about Hillshire is that it did nothing to gain an organic edge. Organic foods is a one key area of the industry where growth exists. Therefore, WhiteWave Foods might be an attractive opportunity.

The company focuses on using plant-based food and drinks, such as Silk and Alpro. The company is also a leader in coffee creamers and half-and-half. Finally, its Horizon brand is a leader in the organic milk category. Therefore, it's a prominent dairy company, and because of its healthy initiatives, one that's expected to grow revenue by 32% and 8% in the next two years, respectively.

Two more possible acquisitions
Like WhiteWave, Dean Foods is a leader in dairy, although far more diversified with more than 50 local and regional brands. With just 3% revenue growth expected this year. Dean Foods is not going to blow anyone away with its growth, but the company is fairly valued at 15 times next year's earnings, and with an enormous manufacturing presence and 19,000 employees, there is a lot of consolidation that could occur to boost its 1.5% operating margin. With dairy being another top non-cyclical good, it could be the next industry to be sought by acquirers.

Lastly, Sanderson Farms is a poultry processing company that produces 100% all-natural chicken, and would likely be attractive as food companies seek to combine meat with chicken. With annual revenue of $2.67 billion, it's far smaller than many of the other noted companies, but with three consecutive years of increased operating margins, the company could be an attractive target.

Final thoughts
With all things considered, there's nothing exciting about this space, and that includes Hillshire Brands. In fact, it's hard to find a distinguishing characteristic that would explain why the merger and acquisition interest has increased so drastically in the last couple months.

The food processing industry as a whole has lacked growth since the recession, as pricing competition has become more intense. Companies have downsized and have become more efficient. As a result, these acquisition attempts might very well be an attempt to gain pricing pressure, which could spark growth.

Dairy is a space that hasn't yet been sought, and when we look at WhiteWave and Dean Foods, you can't help but notice that synergies could exist, which is key in predicting or anticipating future mergers and acquisitions. Watch these two stocks most closely, but also Sanderson, based on the mere interest in the poultry space.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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8/28/2015 4:01 PM
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