Fitch Expects More Strategic M&A Activity in Packaged Foods

Additional merger and acquisition (M&A) activity could be forthcoming for U.S. packaged food companies as they try to enhance their sales growth, according to Fitch Ratings. The recent large acquisition involving Kraft Foods Inc.’s (KFT) combination with Cadbury plc may be the beginning of heightened M&A activity for the sector.

Fitch says leverage has improved recently for many of the packaged food companies, potentially signaling that they are ready to engage in a more extensive level of acquisitions beyond the bolt-on acquisitions typically factored into ratings. The acquisitions are likely to be in core categories that could lead to expansion or strengthening of geographies, similar to the rationale for the Kraft-Cadbury deal.

Emerging markets are attractive for acquisitions or joint ventures because of their faster growth rates and large areas for expansion. -Judi Rossetti, Director at Fitch.

Fitch says large acquisitions with significant debt financing would likely lead to ratings downgrades upon initially higher debt burdens.

Fitch also evaluated potential leveraged buy-out (LBO) and leveraged recapitalization risk in the sector. Overall conclusions reveal that packaged food companies have already done a substantial amount of the cost-cutting and divestures of non-core assets that a private equity firm would engage in, making these companies less attractive than they would have been several years ago.

Although private equity firms have recently shown interest in small packaged food companies, it would be challenging for a private equity firm to generate its desired return on investment by taking a large packaged food company private.

Strategic transactions between packaged food companies are more economically justifiable, since they could generate cost savings from eliminating duplicate corporate expenses, centralizing procurement of ingredients and packaging materials, generating efficiencies in distribution and logistics, and providing or enhancing access to faster growing markets.