The macaroni and ketchup merger of Kraft Foods and HJ Heinz may prove a boon to the far smaller natural and organic food companies that have seized market share as consumers shift away from processed foods, bankers and portfolio managers said.
Brazilian private equity firm 3G Capital Partners and Warren Buffett's Berkshire Hathaway announced a $46bn deal to consolidate the companies Wednesday, one that will create the No. 3 packaged food maker in North America after PepsiCo and Nestle USA..
Digesting that deal will likely sideline 3G, a major buyer of food companies, for the next year or two before it considers another large-scale acquisition, according to industry bankers.
That should take some pressure off bigger players, and potential targets, such as Kellogg or Mondelez International Inc and give them time to bulk up on the organic and natural brands that shoppers increasingly prefer.
"Consumer packaged goods companies are desperate to find ways to grow, and they are not seeing any growth with their products internally," said Phil Terpolilli, an analyst at Wedbush Securities.
The apparent success of General Mill's $820m acquisition of organic mac-and-cheese maker Annie's in September will likely fuel more acquisitions of similar companies, Terpolilli said. General Mills paid slightly more than four times net sales for the Berkeley, California-based company, and credited Annie's products with turning around its U.S. sales in its most recent quarter.
Coca-Cola is also likely to acquire more organic and natural competitors this year to expand its product line, said John Staszak, an analyst at Argus Research.
The burgeoning interest from big companies makes the high valuations of similar organic and natural food companies more palatable, said Matthew Weiss, a research analyst who works on several funds at New York-based Baron Capital Management.
His firm owns shares of WhiteWave Foods, best known for its Horizon Organic dairy products, and United Natural Foods, a distributor of natural and organic foods that is a key supplier to Whole Foods Market.
Baron Capital did not invest in either company solely on the idea that they could be taken over, Weiss said. But he thinks that it is likely that at least one of them will be acquired this year.
"There's a scarcity value to healthy brand portfolios. After Annie's and WhiteWave, the drop off in size is significant," Weiss said.
WhiteWave shares have a takeover premium priced in. They are up 25% so far this year and trade at a price to earnings ratio of 55, well above the average of 19 in the Standard & Poor's 500 Index.
Shares of Hain Celestial Group Inc, the parent company of organic brands including Earth's Best and Ella's Kitchen, trade at a P/E of 47, also suggesting a takeover premium. The shares are up 8.4% this year.
Organic buying spree
The leading US packaged food makers face increasing pressure from investors and their own boards to boost growth and cut costs as consumers shift to products they view as healthier.
US sales of organic products jumped 11.5% to $35.1bn, in 2013, the most recent data available from the Organic Trade Association. Sales of traditional consumer packaged goods rose just 1.5% in 2013, according to the Boston Consulting Group.
To some extent, the organic and natural acquisition spree has already begun. Mondelez International Inc said in February that it was buying Enjoy Life Foods, the privately-held maker of allergy-friendly foods, an estimated $12bn market in the United States. Hershey said it was buying Krave Pure Foods, the maker of a lower-calorie meat jerky, in January.
But Weiss, the fund analyst, sees rapidly-changing consumer tastes accelerating the dealmaking.
"Coconut water, Greek yogurt, quinoa; these are no longer exotic foods but must-haves for grocery stores, and the companies that provide these products are growing much faster than traditionally packaged food companies," he said.
