Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

It's not going to be easy for food and beverage companies to satisfy investors' appetite for growth.

As consumer preferences shift, companies such as Kellogg, Hormel and Campbell Soup face slowing sales in their packaged cereals, lunch meats and snacks. Aggressive cost-cutting is keeping profits afloat, but slashing expenses can only go so far. These companies need to buy sales growth by gobbling up smaller businesses that sell the healthy foods shoppers increasingly want. The only problem is, there don't seem to be enough sellers to satiate the bevy of buyers. 

At this week's Consumer Analyst Group of New York conference in Boca Raton, Florida -- where investors gather each year for free snack samples and a read on where the industry is heading -- executives have made it clear they are armed for deals.

Deep Pockets
Roughly $10 billion of cash is held by North America's 10 largest packaged-food manufacturers. They're all considered investment grade and can borrow money relatively cheaply.
Source: Bloomberg

McCormick on Wednesday said it planned to generate a third of its long-term sales growth from acquisitions. Campbell Soup said its four acquisitions of healthy food and snack companies since 2011 now contribute $1.2 billion of the company's roughly $8 billion in annual sales. It also plans to send $125 million to Acre Venture Partners for venture capital investments in food startups.  

Hormel Foods, the maker of Spam and Skippy peanut butter, saw its biggest one-day stock gain in more than a decade on Tuesday after presenting positive results from a spate of recent acquisitions in the $200 million to $800 million range, such as Applegate Farms and Muscle Milk.

Room to Borrow
Financial leverage at most of the major food companies is low enough that they can add debt without having to sacrifice their investment-grade credit ratings.
Source: Bloomberg

CEO Jeff Ettinger told Gadfly the company is in the market for even bigger acquisitions "that really move the needle" and wasn't really interested in just taking small stakes in companies.

One big challenge when buying up smaller companies is "proving we're not 'Big Food,'" Hormel's Ettinger said. In many cases smaller companies have built their brands as an alternative to big, established companies -- such as Applegate, whose advertisements often poked fun at food giants. So these companies don't want to "sell out" to a General Mills or a Kellogg. 

And when the younger companies do sell, they expect the bigger companies to pay up. For instance, General Mills' $810 million acquisition of Annie’s in 2014 marked the decade’s most expensive U.S. food deal, based on the Ebitda multiple.

That's causing a problem for companies such as Clorox, which said it's looking for acquisitions of U.S.-based health and wellness brands with $50 million to $250 million in sales. But it's finding valuations are too rich, CFO Steve Robb said Wednesday. "It’s not that we haven’t been trying," he said. 

Likewise, Hain Celestial CEO John Carroll said "not everyone is going to get an Annie's multiple." In other words, Hain has identified a bunch of potential targets, but prices are just too high right now. 


Deal Appetite
Last year's record is a bit deceiving given that the Kraft-Heinz merger accounted for a third of the volume. A wave of smaller deals is probably coming as the traditional food giants become starved for growth.
Source: Bloomberg

Food makers spent a record $158 billion on acquisitions in 2015, but that number is a little misleading. A third of last year's total food M&A volume came from one transaction: The mega-merger between Kraft Foods and H.J. Heinz, orchestrated by Warren Buffett and 3G Capital.

Cost-cutting was the main motivation for that deal, which bankers say won't be the case for most of the food M&A going forward. It's all about top-line growth. And as food is such a fragmented market full of hundreds of smaller companies, it's hard to know which brands and products will remain popular and which ones will fizzle out as diet fads change. Or as Hain Celestial CFO Pat Conte put it Wednesday, finding the right acquisition target is akin to"mining for gold." 

One company that fits the bill for some acquirers is WhiteWave Foods, which makes Silk almond milk. It has one of the best sales outlooks among the publicly traded foodmakers, and with a market value of $6.7 billion, it's still a feasible target. There's also Chobani, the Greek yogurt company that recently rejected an offer from PepsiCo for a majority stake. (Though even Greek yogurt growth is beginning to slow.)

And there's always the risk of picking the wrong target -- just ask ConAgra Foods, which last year had to undo its largest acquisition ever because it overpaid and the business wasn't a good fit. But with lackluster growth in their traditional businesses, food and beverage companies that want to last for the long run don't really have a choice.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Shelly Banjo in New York at
Tara Lachapelle in New York at

To contact the editor responsible for this story:
Mark Gongloff at