Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.

Microwavable sausages are signaling that America's most powerful food-industry executives are being taken for fools. 

It seems the leading U.S. packaged-food companies -- General Mills Inc., Kellogg Co. and the like -- are perceived as so desperate to buy growing brands that they'll pay absurd prices. That's the only explanation I can think of for why some investors are bothering to wager on rival bids for Bob Evans Farms Inc. when the maker of heat-and-eat foods already agreed to a rather toasty deal with Post Holdings Inc. last month. 

Long Shot
Post's offer represented 15% premium when the deal was struck, but some traders may be betting Bob Evans will draw a competing bid as foodmakers show a need to do deals
Source: Bloomberg

The transaction values Bob Evans at about $1.6 billion (including debt), or $77 on a per-share basis. Its stock has traded above that level ever since the deal was announced -- not by much, only 20 cents as of midday Tuesday, which isn't a large negative premium as far as merger arbitrage goes. But the gap had been even wider just days ago, and even at current levels it's enough that at least some traders must be thinking there's a chance another suitor will come out of the woodwork. And that alone is quite telling of the M&A environment in the food space because Post is already paying a full price. Public bidding wars are also rare these days.

Known for cereals, Post has been re-configuring its lineup with breakfast foods that have more millennial appeal, a challenge facing all the traditional supermarket suppliers. Its offer for Bob Evans is almost 16 times the company's trailing 12-month Ebitda, a valuation that tops most U.S. food deals aside from the few recent ones that stand out as remarkably expensive -- such as the 28 times Ebitda that Pinnacle Foods Inc. paid for Boulder Brands and the almost 36 times Ebitda that General Mills paid for Annie's.

Paying Up
The median Ebitda multiple for acquisitions of U.S. food companies has risen sharply in the last couple of years:
Source: Bloomberg
Note: Pending and completed M&A transactions worth at least $100 million.

Ebitda multiples tend to slip through the cracks when the transactions themselves are on the small side (both Annie's and Boulder Brands were sub-$1 billion targets). That doesn't mean there aren't consequences for overpaying, such as writedowns, overly optimistic forecasts, further market share pressures, less investor faith, etc.

Following Amazon.com Inc.'s takeover of Whole Foods Market, I've been on record predicting other food giants will be back on the hunt for acquisitions in what will be a Catch-22: They need to boost revenue and profits, but pegging the wrong supermarket-shelf winners or paying too much for them will only create more headaches.

Bob Evans traders shouldn't hold out for higher bids. And if I'm wrong, we need to take a deeper look at whether this takeover trend is healthy in the long run. 

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

  1. Bob Evans is also the name of a restaurant chain, which was taken private by Golden Gate Capital earlier this year. Post is acquiring the food-manufacturing business that was left over after that other deal.

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