Big Food mergers, demergers and summary
- Global industry dynamics are being reshaped by rapid mergers, demergers, and consolidations in the global food sector
- Separations are made by major players to boost portfolios, streamline their business and increase growth.
- Stronger companies focus more on acquisitions, while brands with less financial strength are focused on survival.
- Spun-off businesses enjoy strategic freedom but face financial challenges early on
- As investor and cost pressures intensify, analysts expect more divestments
Big Food has been awash in drama for several months, just like the rest of the world.
Not long after a major CPG company has completed a deal that will change the industry, news breaks of upcoming mergers or acquisitions.
Take a look at last year’s figures.
Mars, Inc. has acquired the snack brand Kellanova in a historic $36bn deal (EUR31bn).
Ferrero Group acquired WK Kellogg Co., merging two of the largest names in the food industry.
Kraft Heinz announced its intention to divide into two distinct entities. This was quickly followed by the appointment a new chief executive officer. The split has been put on hold because the share price of the Kraft Heinz Company dropped and Berkshire Hathaway decided to sell their entire stake. We’re watching this closely to see what happens.
Nestle has begun the sale of a part of their coffee business and sold their stake in German food company Herta Foods. They are also in the process to sell a part of their waters business. All this while they cut 16,000 worldwide jobs.
Unilever is the most recent mega-demerger.
It was a rapid process, with rumours about a break-up surfacing just two weeks before. Unilever’s Foods and McCormick, a sauces-and-spices maker in the US, merged to form this latest megamerger.
The rollercoaster is quite the ride.
What’s behind the dealmaking frenzy? Who’s the next to be a victim?
Ferrero Group acquired WK Kellogg Co., merging two of the most recognizable names in food. (Image: Ferrero Group)
Big Food: What is driving the industry?
The recent rise in demergers within the food and beverages sector is a reflection of a strategic recalibration following several years of high inflation rates, low volume growth and increased capital intensity.
Many companies, as a result, have separated their portfolios in order to strengthen their balance sheets and focus investment on core business categories with higher growth and margins. They are moving away from older businesses.
The rapid change in expectations of consumers is another key factor behind this wave.
The demand for sustainable, healthy, high-quality products and services, as well as premium, high-end experiences has increased the urgency for companies to focus on specific categories.
At the same, increasing pressure from investors and shareholders has forced multinationals unlock more value faster, usually by dividing sprawling portfolios up into smaller, more focused businesses.
Companies with a better financial standing – i.e., low debts, solid assets and dependable cash flows – are free to acquire other brands and companies. Mars, Ferrero, and McCormick are perfect examples.
Separations aren’t just a way to free up some cash. Businesses that are stuck in a certain strategic direction can find new possibilities.
Leschiutta says that divestments allow businesses to focus on innovation, sustainability, and fast-growing segments by refocusing their strategic priorities and allocating capital.
It’s still not easy, especially for the spin-off.
Unilever will merge its Foods division with McCormick to create a business worth $20 billion. (Image: Getty/JJFarquitectos)
Two halves of the same story
Moody’s Leschiutta says that while larger entities benefit from more clarity in their investment priorities, businesses spun off or sold may be subject to tighter budgets and a loss in scale in the beginning.
He says that many spun-off companies have had difficulty establishing themselves independently, and often lost some of their commercial terms or payment terms as they were previously part of larger groups.
Newly independent companies face a variety of operational challenges in addition to the financial ones. Losing shared corporate functions, such as IT and procurement systems or HR and legal support to supply chain and supply management can cause significant disruptions during transition. Many are forced to rely upon temporary transition services agreements (TSAs) which delay autonomy while adding short-term cost as teams recreate essential infrastructure.
Disposals tend to have little impact on the rest of the business, especially when it involves a complete exit from an activity with limited strategic relevance. Relationships with retailers are generally stable.
In the initial stages of spin-offs, market reactions are also crucial. Investors are often keen to assess whether a newly separated brand can grow without the support of its parent. Some newly listed companies or stand-alone businesses benefit from increased investor interest, a clearer strategy and a renewed focus on the business.
Others are under pressure when performance or transition issues become apparent.
There’s good news too for brands spun off from larger corporations. They can benefit from the freedom that comes with being freed from larger corporate structures. This could lead to a brand revitalization, a sharper focus on strategic growth, or redefining their plans.
(Image: Getty/Ekaterina79) Could Mondelez be the next big M&A deal? (Image: Getty/Ekaterina79)
What is next for Big Food
The global food and drink industry is entering a new age, one that’s characterized by a sharper focus on strategy, an aggressive portfolio restructuring, and a pivot to long-term sustainability.
Conglomerates that are slow and sprawling will soon be a thing of the past. In their place we see leaner and more focused businesses who are investing in categories they think they can dominate.
Unilever’s rapid demerger shows how quickly plans can be accelerated once the boardrooms acknowledge that their old model doesn’t work. Nestle’s gradual unbundling non-core assets indicates the same trend.
The acquisitions by Mars, Ferrero, and McCormick show how important it is to have the ability to purchase when many other companies are in the process of selling.
So, who’s next?
Several major players may be the next to fall under pressure based on what is happening now:
- PepsiCo: Although structurally sound, the vast range of products could use some sharpening. This is especially true as beverage margins continue to be squeezed and company focuses more on premium snacks and functional foods.
- Mondelez International: It has sold off multiple non-core products, including the developed market gum division. Chocolate and biscuits are performing well. Another non-core acquisition or disposal is possible.
- General Mills It is known for its large divestments including the recent sale of its yoghurt brand to Lactalis.
The company could shed slower-growth brands in order to focus capital on areas such as pet food and healthy snacks, two growth-producing sectors.
- Danone: After years of inconsistent performance, the business already signaled their intention to simplify. The company’s priorities remain plant-based products, medical nutrition, and premium dairy. This could mean that it will continue to sell lower-margin assets in the traditional dairy sector.
The pace of M&As in the food and beverage industry is not slowing, but rather increasing.
The cost pressures, the investor expectations, and changing retail economics are all forcing Big Foods to reconsider who they are and what they want to become.
Some people think that this means tearing apart. Others will buy up everything they see.
In either case, we are about to enter another year of change in the industry.
We’ll keep you updated on all developments.