Deals

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

In food M&A, it's a seller's market -- and the little guys are calling the shots.

The buyers may be the ones with $10 billion and $20 billion-plus market values. But many smaller players offer growing brands, geographic diversification or some other benefit that the industry leaders increasingly need, and they're using this to their advantage in M&A negotiations. Just this week, one such small fry snubbed a pretty compelling takeover offer, while another dangled a for-sale sign. 

Premier Foods, the British maker of Bisto gravy and Mr. Kipling cakes that was valued at just 260 million pounds ($367 million) as of Tuesday, confirmed Wednesday that it recently rejected two takeover bids from U.S.-based McCormick & Co., the $12 billion company that dominates the grocery store's spice aisle. McCormick's latest offer of 60 pence a share is a whopping 90 percent higher than Premier Foods' average stock price in the last 20 trading sessions. That would rank as one of the largest takeover premiums ever for a foodmaker from a developed nation, according to data compiled by Bloomberg. 

Paying Up
There's a difference between being "for sale" and "on sale." McCormick isn't going to get a bargain in a Premier Foods deal.
Source: Bloomberg
*During the past five years

Is Premier Foods opposed to selling, or just being coy? Investors are signaling the latter. The shares surged some 70 percent on Wednesday to about 54 pence, their highest price since July 2014. Premier Foods says it has instead chosen to partner with Japan's Nissin Foods, which your college self can thank for inventing instant noodles. Together, they plan to leverage their distribution in various global markets and share technical know-how to create new products. But with McCormick coming off its worst year for revenue growth since the U.S. recession, plus a balance sheet with plenty of room for acquisitions, this spice maker can pack a punch. And so this situation may not be resolved yet.

Then you've got Ready Pac Foods, a maker of single-serve salads, teasing suitors. CEO Tony Sarsam told Bloomberg's Craig Giammona that the company will start shopping itself to large packaged-food companies in the next two years. Ready Pac, which is currently owned by private equity firm H.I.G. Capital and generated about $677 million of sales last year, plays in the fresh/healthy segment of the food market. That's where the growth is for shoppers from younger generations. A major theme at the Consumer Analyst Group of New York conference last month was how the leading foodmakers -- household names like Kellogg, Campbell Soup and General Mills -- are seeking deals that give them this exposure. Their challenge has been finding willing sellers at reasonable valuations.

Time to Eat
As sales growth slows, food companies are embracing deals, particularly for smaller businesses with brands in the fresh, healthy or organic segment of the market.
Source: Bloomberg
Revenue for North America and Europe's 20 largest packaged-food manufacturers by market value

It just goes to show that smaller companies are expecting suitors to pay up. And they know they can, because while valuations relative to sales and Ebitda may look very rich, the actual cost in dollar terms is most certainly manageable for a leading food manufacturer. When General Mills bought organic mac-and-cheese company Annie's in 2014, it paid about 36 times trailing 12-month Ebitda, the decade's highest multiple for a U.S. food acquisition. But it was still only an $810 million transaction, and General Mills has a $36 billion market value. 

As deal activity overall slows down a bit from last year's global record, the packaged-food industry is one area investors can probably count on to remain robust. The targets may be on the smaller side, a la Premier Foods. But so long as the big buyers are needy and have a lot of access to cash, the sellers are going to push the price boundaries in takeover talks. 

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

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net