Over the past decade, packaged food companies in the U.S. (and Europe) no doubt have struggled. Investor sentiment over the cause of those struggles, however, has been split mostly among two camps.
The more negative interpretation is simply that the industry’s best days are behind it. In this view, legacy manufacturers are facing a landscape that’s permanently altered. Major brands are simply less valuable than they once were.
Even before inflation jumped after the pandemic, consumers were growing increasingly comfortable with private label brands. The competitive advantage of size and scale has been minimized by technology: younger, smaller, nimbler and more niche brands can advertise just as effectively (through social media and other channels) and can manufacture nearly as efficiently (through outsourcing and other trends).
Meanwhile, the necessary homogeneity of those brands has flipped from being an edge to a drawback in an increasingly fragmented market.
The latest trends don’t mean major brands will disappear, but it makes it difficult (and for some, impossible), to own old-line brands in the modern world.
The more hopeful take is that those brands still have value, even if there are very real challenges. The steep inflation earlier this decade required a necessary reset, but major food players are responding. While some categories may be permanently changed, nimble companies can rework their portfolios to focus on faster-growing end markets. Scale still matters (particularly with retailers), and so do brands.
In this telling, the problem for the sector has been based more on execution than secular change. Even looking back to before the pandemic, acquisition activity across the industry has mostly destroyed value rather than created it.
Kraft Heinz, the biggest player in the space, focused too much on cost-cutting rather than brand-building. It’s impossible at this point to argue that the packaged food industry is the same as it was twenty years ago, but there is still a case that better operations and better strategy mean packaged food players can prosper.
At the moment, the negative view clearly is dominant. Kraft Heinz stock is at its lowest level since the mega-merger took place in 2015. Campbell stock is back where it was in 2002; General Mills has hit a 15-year low. But recent reports of a potential deal between McCormick and Unilever show that at least one company in the space still sees long-term opportunity – while another is simply looking to get out.
McCormick Looks to Buy Out Unilever
Last week, the Wall Street Journal reported that McCormick, the largest spice-maker in the U.S. and owner of condiment brands French’s and Frank’s Red Hot, is in talks with Unilever to acquire its packaged foods business.
The deal is not guaranteed to happen – and there are stumbling blocks beyond simply agreeing on price.
McCormick’s sales are less than half those of the food division it’s looking to acquire. Debt financing isn’t available to cover more than a small portion of the consideration Unilever would accept, meaning McCormick would have to issue stock to Unilever. But that in itself can create a problem for the merger: Unilever would then own likely more than half of a business that is agreeing to sell, meaning investors will see the likelihood of continued sales into the market.
What Unilever and McCormick See
The fact that talks have progressed to a serious level (after Unilever reportedly held similar discussions with Kraft Heinz, a reputed suitor for its entire business nearly a decade ago) itself shows that two views of the industry are possible even among major food companies themselves.
For Unilever, it seems clear that the company simply wants out of packaged food.
Former CEO Hein Schumacher was pushed out just over a year ago for not moving fast enough to remake the company.
For McCormick, however, this is a potentially transformative bet that there’s still value to be had in packaged foods – or at least the right kinds of packaged foods. While the size of the swing creates a challenge, the two companies’ portfolios do line up well. Most obviously, adding Unilever’s Hellman’s mayonnaise to McCormick’s existing condiments lineup is a way to add negotiating power with retailers for pricing and shelf space, while setting cross-brand promotional opportunities, as well.
But given the sheer size of the financial commitment (and financial engineering) required, it’s impossible for McCormick to even contemplate such a deal without having an optimistic view toward the future of packaged foods. A failure to jumpstart Unilever’s brands almost certainly would crush McCormick stock.
McCormick Goes Big
In essence, the Unilever deal would be a more extreme version of McCormick’s acquisition of the food business of Reckitt in 2017. That purchase brought on Frank’s and French’s and was the first step in expanding McCormick’s reach beyond its legacy dominance of the spices and seasonings market.
And while it was risky (McCormick took on heavy debt to finance the purchase), McCormick did have some success, particularly in the first few years. McCormick stock posted strong returns and often the most optimistic valuation in the space.
The irony at the moment, however, is that investors no longer believe the Reckitt deal was a success. McCormick stock itself is at an eight-year low. Since the Reckitt acquisition was announced, even with dividends shares have returned on average just 3% a year.
Of course, optimistic investors would believe that the recent sell-off is an overreaction by the market, one that creates an opportunity. It seems quite clear that McCormick executives and its board of directors agree. They wouldn’t consider betting their company otherwise.
About the author: Vince Martin is an analyst and author whose work has appeared on multiple financial industry websites for more than a decade; he’s currently the lead writer for Wall Street & Main. As of this writing, he has no positions in any companies mentioned.
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