If recent events are any clue, M&A activity appears to be heating up on Wall Street. That's no surprise: Shares of smaller companies still trade below 2007 valuations, and cash-rich industry giants are searching for ways to outgrow sluggish economies.

Lately, the tech and pharma sectors have been grabbing headlines, with acquirers including Abbott Labs (NYSE:ABT), Dell (NASDAQ:DELL), and Cisco (NASDAQ:CSCO). But there's another sector in which M&A action looks poised to take off: consumer staples. 

Buying 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. Kraft investors are familiar with this equation. The $40-billion mac-n'-cheese-maven is currently pursuing $17.6 billion Cadbury, prepared to bankroll the acquisition with a mixture of existing cash plus new debt and shares.

Whether or not that particular deal pans out, the industry appears ripe for consolidation. At least, that's what Unilever (NYSE:UL) CEO Paul Polman recently said, not long after the basic-goods giant snapped up the personal-care brands of Sara Lee. Polman's forecast makes sense; with the outlook for U.S. and Western European consumers uncertain, companies are eager to expand their product portfolios and push deeper into developing and emerging markets.

What might sector M&A activity look like? In the table below, I've listed companies that boast a portfolio of strong, market-leading brands, all wrapped up in a digestible enterprise value:


Enterprise Value

Current Share Price

2007 Share Price *

2007 / TTM OCF per Share

% International Sales

H.J. Heinz (NYSE:HNZ)

$17.7 B



$3.18 / $3.71


Clorox (NYSE:CLX)

$11.0 B



$4.47 / $5.15



$11.1 B



$2.27 / $2.50


Sara Lee

$9.8 B



$1.32 / $1.23

45.5% **

Data current as of Oct. 22. Sources include Yahoo! Finance and company reports.
* Year-end price.
** Includes brands the company has agreed to divest.

Except for Sara Lee, each company has boosted operating cash flow since 2007, yet their shares trade mostly lower. For a deep-pocketed competitor on the prowl, that's an appealing combination.

Assuming that potential bids would come from companies within the sector, the list of potential acquirers is limited.


Market Cap

Total Debt

Interest Coverage


$83.9 B

$16.9 B


Procter & Gamble (NYSE:PG)

$169.7 B

$37.0 B



$39.6 B

$3.8 B



$166.8 B

$24.8 B


Data from Reuters and CapitalIQ on Oct. 22.

To determine who might hitch up with whom, let's propose some potential partnerships, and see whether any match especially strikes our fancy.

Eau de bleach
Among the potential darlings, Clorox first catches my eye. Financial metrics alone make the company an attractive target. Trading at a forward P/E of 12.9, versus a five-year average of 16.0, the company's valuation is appealing. Moreover, at $11 billion in enterprise value, deal size would hardly be prohibitive for a potential purchaser, even after tacking on a market premium.

There's much to like about Clorox the company, too. Its product portfolio stretches across personal- and home-care categories as well as packaged foods, encompassing popular brands such as Burt's Bees, Armor All, Scoop Away cat litter, and Hidden Valley salad dressings. All told, 88% of its brands hold No. 1 or No. 2 market-share position.

The company hasn’t been immune to the private-label threat, but it's held its own. For the fourth quarter of fiscal 2009, overall market share was down slightly, but flat for the full year. On a quarterly and annual basis, volume slipped 2% and 1%, respectively, partially owing to a product exit.

From a suitor's perspective, Clorox's portfolio has some real gems, including Brita water filtration products and the Green Works line of natural cleaners. Both brands tap the health and sustainability megatrends, with the former also playing on the widespread exodus from pricey bottled water.

Colgate-Palmolive probably has the size and financial strength to make an offer, but acquiring Clorox would mean shifting product focus away from personal and oral care. Since those categories have arguably helped the company perform well during the recession, I doubt management would be interested. P&G is a more likely suitor. Management is keen to restore growth, and Clorox's brands would give the behemoth greater control of categories such as detergent, all while driving marketing and other efficiencies.

Additional speed-dating
Although it's by far the largest of the potential targets, H.J. Heinz' international footprint is awfully tasty. Better yet, emerging markets -- the jewel of consumer-focused companies -- power 14% of Heinz's net sales. Brands that include the eponymous Heinz, Classico, and Ore Ida would nicely fill out the packaged-foods portfolio of either Unilever or Nestle. I believe Unilever is more likely to pick off individual brands than make a big acquisition, but Nestle is a different story. When you're the world's largest food maker, hey, why not grow a little bigger? Plus, Nestle has been raising mounds of cash by selling off its stake in eye-care company Alcon. A Heinz bid could involve little in the way of new debt or shares.

Hershey and Sara Lee are both relatively small in size, and while both certainly have favorable characteristics, they have fewer qualities that jump out at me as suitor bait.

Ultimately, there's no way to know what will happen in the M&A world. However, if you can make a convincing argument for why a company could be a takeover target, you might have good reason to pick up a few of its shares for your own portfolio.

Related Foolishness:

Clorox, H.J. Heinz, Procter & Gamble, and Unilever are Motley Fool Income Investor picks. Unilever and Alcon are Global Gains selections. Dell is an Inside Value selection. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletter services free for 30 days.  

Fool contributor Mike Pienciak doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.