Shares of Archer Daniels Midland (NYSE:ADM) got a slight boost this week after the company announced it was acquiring Swiss flavorings company Wild Flavors for $3.1 billion in cash and debt. However, despite signaling a move into an increasingly popular niche market, the deal won't do much for the agricultural giant overall and means it still has lots of work if it wants to diversify away from volatile commodities. It might also mean we'll see other deals suddenly pop up in the space.
Archer Daniels needs something to get it out of its funk. Sure, it's stock is up 10% so far in 2014 and almost 35% over the past year, but the company still faces troubles in its core grain merchandising and handling operations due to severe winter weather and China's rejection of GMO corn. And with the creation of Ardent Mills by the merger of the milling operations of ConAgra, Cargill, and CHS, it's got a new, bigger rival to deal with. ADM remains the second-biggest miller on the block, with a 17% share, but it's now dwarfed by Ardent Mills, which owns a third of the market.
The move into flavorings helps ADM break further away from its reliance on commodities and lines up with the company's stated promise to use the majority of its capital expenditures for expansion and international growth. Last year it attempted to buy GrainCorp for a similar amount of money, but the Australian government rejected the takeover on national interest grounds.
For a company with $90 billion in sales, Wild Flavors' $2.5 billion in annual revenue won't move the needle all that much, but ADM intends to begin a new business unit called WILD Flavors and Specialty Ingredients that will house Wild Flavors (and its own specialty ingredients) and where it anticipates a substantial runway still for growth.
It's possible it could happen. According to the folks at TechNavio, the global flavors and fragrances market is expected to grow at a compound annual rate of 5.6% from 2013 through 2018 as demand for prepackaged food and drinks widens. In the press release announcing the acquisition, ADM CEO Patricia Woertz said, "Natural flavor and ingredients is one of the largest and fastest-growing consumer trends in both developed and emerging markets."
That growth might entice other flavor and fragrance rivals to similarly add smaller shops to their portfolios. Japanese giant Ajinomoto was actively pursuing Wild Flavors and is thought to be looking at German flavorings specialist Symrise as a consolation prize. Analysts also now see Ingredion (NYSE:INGR), which focuses on starches and sweeteners, animal feed, and edible corn oil, as undervalued as a result of the price Archer Daniels paid for Wild Flavors.
However, unlike McCormick (NYSE:MKC), which contends that its products contribute to 90% of a meal's flavor and just 10% of its cost, Ingredion's main contribution is high-fructose corn syrup. Despite its prevalence in so many foods -- it remains the most popular form of sweetener on the market today, commanding a 52% share -- HFCS is under attack on several fronts as consumers reject its highly processed nature and its base being derived from genetically modified organisms.
McCormick maintains an active acquisition pipeline, having made a number of buys over the years, including Zatarain's and Lawry's. Its 2013 purchase of Chinese broth maker Wuhan Asia-Pacific Condiments helped boost its profits earlier this year.
Of course, International Flavors & Fragrances is one of the biggest players in the flavoring market, with a market cap in excess of $8.6 billion and revenue of nearly $3 billion. Other major players include Givaudan and Firmenich.
Archer Daniels Midland's purchase of the world's sixth-largest provider of naturally sourced flavors for food and beverages certainly helped its own position, though at the moment it won't do much to change the company's focus. If it puts ADM into the market for further acquisitions, however, or causes peers to step up their own purchases, it may create a premium asset that could realize even greater value.
Greater investor appetite for M&A activity is likely the reason why Archer Daniels Midland saw its stock rise, as Wild Flavors won't do much for business right now. It may just provide a platform for further growth.