There has been a recent flurry of M&A activities by food companies such as Post Holdings (NYSE:POST), TreeHouse Foods (NYSE:THS), and Hillshire Brands (UNKNOWN:HSH.DL). Given the academic evidence that most M&As fail, which of these companies are creating long-term shareholder value, and how many of them are literally throwing cash away?
No longer a one-trick pony
Post Holdings, the third-largest ready-to-eat (RTE) cereal manufacturer in the U.S., recently announced the acquisition of Michaels Foods, the biggest processed egg producer in the U.S., in April.
This acquisition is especially timely given the fact that cereal consumption has been on a steady downtrend for the past few years, declining by 2%-3% every year from 2011 to 2013. Post Holdings was inevitably affected by this trend, having experienced negative revenue growth in two out of the last three years. There are two key reasons for this. First, more consumers are having their breakfast on the go as the busy fast-paced lifestyle becomes the norm. On top of that, people are also seeking healthier breakfast options.
Michael Foods is the largest seller of processed eggs to leading restaurants and foodservice distributors in the country. As an increasing number of people choose to get their breakfast outside of their homes and consciously add more protein to their diets, Michael Foods and Post Holdings will be key beneficiaries. This market segment's growth is validated by NPD data showing that breakfast has been the only growing daypart in the quick-service restaurant (QSR) restaurant segment with a 5-year CAGR of 4.1%.
Post Holdings has successfully transitioned itself from a single-product company (RTE cereal) to a diversified consumer products enterprise with the recent acquisition of Michael Foods, along with seven other M&A transactions in the past 12 months. The "new" Post Holdings will potentially increase its sales by four-fold and have no single product segment (including cereal) accounting for more than 40% of its revenues.
No more cans
This month, TreeHouse Foods announced the acquisition of Protenergy Natural Foods, a manufacturer of private-label broths, soups, and gravies. TreeHouse Foods is the largest manufacturer of pickles and non-dairy powdered creamer, private-label salad dressings, and instant hot cereals in the United States. Adding Protenergy Natural Foods to its product portfolio will allow the company to capitalize on changing consumer preferences.
Consumers are generally moving away from canned food for a few reasons. One is a matter of health, as canned foods typically have Bisphenol A (BPA), an industrial chemical found in can linings. Another factor is convenience. Food packaged in cans tend to be bulkier and heavier, making them more difficult to carry and store. As a result, people are shifting from cans to carton packaging as the preferred way of consuming broth, soup, and other shelf-stable liquids.
This is a win-win situation for producers like TreeHouse Foods and Protenergy Natural Foods, as carton packaging is usually cheaper than their canned counterparts because of lower material costs.
Protenergy Natural Foods is a leader in carton packing technology (aseptic packaging.) Its proprietary technology reduces production times and packaging costs while increasing the speed of production. Given that 70% of broth is already now packaged in cartons, TreeHouse Foods' purchase of Protenergy Natural Foods ensures that it stays relevant with its customers.
Leveraging on the health & wellness trend
Hillshire Brands, a leading manufacturer and marketer of branded meat-centric food products, disclosed in April that it plans to buy waffle and pancake manufacturer Van's Natural Foods. While many of its peers are suffering from private label competition, Hillshire Brands has been a notable exception. It is the market leader in hot dogs, corn dogs, and smoked/cooked sausage, segments where private label product penetration rates are under 5%.
Hillshire Brands isn't resting on its laurels, however, given the understanding that consumers can be pretty fickle-minded. In particular, Hillshire Brands has been actively developing new products that will help it leverage on the health & wellness trend. These new products include low-calorie versions (with under 300 calories) of Jimmy Dean Flatbread Sandwiches and healthier meat products with less fat such as Ball Park Lean Franks. Its acquisition of Van's Natural Foods sings a similar tune, as Van's Natural Foods boasts a line of gluten-free breakfast foods.
It is estimated that between 5% and 10% of Americans may suffer from some form of gluten sensitivity. More importantly, gluten-free foods are also typically more than three times as expensive as non-gluten products. The strong demand for these products and the pricing power they command suggest that the acquisition of Van's Natural Foods makes good economic sense.
Foolish final thoughts
Consumer preferences are changing rapidly, and only companies that keep up with latest trends are able to retain market share and keep customers happy. Post Holdings, TreeHouse Foods, and Hillshire Brands haven't just acquired companies for the sake of empire building. Instead, they have bought the right companies that will bring them closer to what customers really want.
As a result, I am positive about the recent M&A activities by these three food companies. Post Holdings stands out in particular for its transformation from a single-product-dependent enterprise to a diversified entity benefiting from multiple growth drivers.