In one three-week period last summer, $56.2 billion worth of deals were announced, including two megamergers: Bestfoods, the world's 21st largest food company, ended its flirtation with Unilever NV (No. 5) when the Anglo-Dutch conglomerate sweetened its offer to $24.3 billion, and cracker king Nabisco (No. 22) was bought for a budget-busting $29 billion by No. 2 Philip Morris Co., a 3.5 multiple to sales. (See complete list of this year's top 100 on page 72.) Philip Morris will combine Nabisco with its Kraft Foods operations, creating a food conglomerate that challenges Nestle for the title of world's largest food and beverage company.
When they weren't setting a hook for each other, industry leaders were casting for smaller fish, particularly firms in the good-for-you food category (see related story, page 66). The merging and maneuvering received the tacit approval of an investment community spoiled by growth rates in new-economy companies. Not satisfied with food and beverage's single-digit growth rates, investors yearn for more spectacular spikes, and if that means augmenting organic growth with acquisitions, so be it.
The 100 food conglomerates included in this year's Top 100 had combined sales of $651.7 billion in their most-recent fiscal years, a 3 percent improvement over the previous year. The 38 U.S.-based operators listed accounted for $309.34 billion of that total, up 4.1 percent, while the 62 non-U.S. entities experienced 2 percent growth to $342.33 billion.
Steady and stodgy growth leaves the investment community cold, and the stocks of publicly traded food companies remain out of favor. "Food companies are growing at 2 to 3 percent, and the stock market demands 20 to 30 percent growth," notes analyst Adam H. Ismail of Health Business Partners, a Providence, R.I. investment bank. By acquiring entrepreneurial firms that have carved a niche in the natural foods business, major food companies hope to leverage their distribution strength to achieve double-digit growth.
One example is Kashi, the natural cereal maker that pushed its way into the ranks of the top 25 cereal sellers with distribution largely limited to health-food stores and Whole Foods-type grocers. Now part of No. 25 Kellogg, Kashi should experience significantly greater growth by saturating mass merchandisers, Ismail predicts. One potential blockbuster: GoLean, a line of high protein, high fiber cereals, drink mixes and snack bars being promoted as weight-loss aids.
Similar growth strategies are being deployed for energy bars and other categories. The next hot food could be colostrum, Ismail suggests. This antibody-rich ingredient is derived from cows within 36 hours of birthing, then subjected to minimal, nonthermal processing. Firms such as GalaGen Inc. have invested a combined $75 million to develop colostrum as an immune-enhancing food additive, Ismail says, and dairy giants can be expected to court them if a market emerges.
While the sector for natural foods and beverages is heating up, functional foods are on the wane, which is depressing acquisition activity. Generally, M&A activity in the food industry is down, despite the high-profile deals. The actual number of mergers and acquisitions involving food processors slipped almost 30 percent in the first half of this year, reports the Food Institute in Fair Lawn, N.J. The institute tracked 91 U.S. food and beverage deals through June, down from 1999's 129. For all of last year, ownership of 229 food companies changed hands, off from 230 in 1998, according to Brian Todd, senior vice president.
But the cash value of those sales is setting new standards, thanks in part to purchasers' willingness to pay premiums unseen in recent years. Unilever's winning bid for Bestfood represented a 32 percent premium over its initial offer.
Food and beverage occupies a global stage, and there were a number of other noteworthy deals. Brussels-based Interbrew (No. 56) purchased No. 61 Bass plc for $3.45 billion. No. 8 Diageo sold its $6 billion Pillsbury division to No. 26 General Mills, and Danone (No. 16) received $2.7 billion from the sale of Kronenbourg to Scottish & Newcastle (No. 74). Pending is the expected sale of Elmhurst, Ill.-based Keebler Foods for up to $5 billion, suggesting 2000 may be remembered as food's megadeal year.
Campbell Soup Co. (No. 29) and H.J. Heinz Co. (No. 19), two venerable players whose products are associated with the center of the retail store, are shrugging off investor dissatisfaction and forging ahead with capital projects designed to make them more competitive. Campbell, for example, is rolling out its seven best-selling condensed soups in a new ready-to-serve format featuring easy-open tops. Combined with stepped-up marketing and advertising, the new packaging could kick-start growth in the wet soup market, a category Campbell dominates with 70 percent share but which shrank 3 percent last year domestically, 2 percent worldwide.
The company also is pushing ahead with processing improvements, notably aseptic particulate processing under the Liebig brand name in France. Campbell continues to invest in the fast-growing away-from-home category, with a new plant for Stockpot refrigerated soups coming on line to support foodservice initiatives.
Heinz is forging ahead with Operation Excel, a $1.1 billion restructuring plan that included the closing of 11 factories last year and a refocusing on six core food categories, including infant foods. As part of that initiative, Heinz has offered $185 million for the Milnot Holding Corp., the chief asset of which is Beech-Nut baby food. An acquisition would double Heinz's share of the $800 million U.S. category to 28 percent, well behind segment leader Gerber, a unit of Swiss-based Novartis AG (No. 87 in the Top 100). The U.S. Securities and Exchange Commission has challenged the deal.
In the meantime, Heinz is pressing ahead with packaging innovations that earned the firm Packaging Leader of the Year honors from the Packaging Education Forum. Recent breakthroughs include the EZ Squirt ketchup bottle, featuring an adjustable nozzle and available in traditional red and "Blastin' Green" colors. The ketchup is fortified with vitamin C and should continue sales gains that have upped Heinz's share to 54 percent in the U.S. and 75 percent in the Canadian ketchup markets. The company also rejuvenated the Ore-Ida retail franchise with the category's first stand-up resealable package.
Another noteworthy corporate project is No. 3 ConAgra Foods' Operation Overdrive, a restructuring program that already represents a $1.1 billion investment in the last two years. The program is driving down costs and enhancing customer channelization of resources, particularly in the fast-growth packaged and refrigerated food segments.
ConAgra beefed up an already-formidable lineup of brands with August's acquisition of International Home Foods, which owns the Hunt's, Orville Redenbacher, Peter Pan and Swiss Miss brands, among others. ConAgra valued the deal at $2.9 billion.
In other industry segments:
Parmalat's $6.25 million stake in Transora wasn't enough to secure a seat on the board -- other consumer product companies ponied up another $240 million -- but it does strengthen relationships with 34 other food companies, including 22 from the Top 100 list. Collectively, Transora investors spend $350 billion annually in operating expenses, giving the Internet startup an edge in reshaping procurement practices. "The sheer number of companies coming together is unmatched in the B2B marketplace," claims Judy Sprieser, a Sara Lee Corp. (No. 15) executive who chaired the exploratory committee that led to the Transora initiative.
Major corporations also make inviting legal targets, and the food industry has experienced its share of major judgments and settlements this year. One of the biggest came in August, when Interstate Bakeries Corp. (No. 62) was ordered to pay $120 million in punitive damages on top of $11 million in actual damages to 21 black workers who alleged racial discrimination at IBC's Wonder Bread plant in San Francisco. IBC is appealing.
In May, Sara Lee settled a class action suit relating to 1998's listeriosis outbreak linked to it Ball Park Franks. Sara Lee, which will pay up to $50,0000 to claimants whose illnesses lasted more than four days, estimated the settlement's cost at less than $5 million. The plaintiff's attorney, on the other hand, suggests that will only be a fraction of the cost and does not include several wrongful death cases still pending.
These diversions aside, the world's leading food companies will continue to focus on the product development and process improvements that pushed them into the elite ranks in the first place. Acquisitions are a part of business life, but organic growth always has had the most staying power in the food industry.
In January, the Kraft Foods division of Philip Morris buys Chicago-based Boca Foods and shells out $268.4 million for Balance Bar Co., the Carpinteria, Calif., energy bar maker that went from $1.3 million sales in 1995 to $100.9 million last year.
In February, Nestle USA acquires PowerBar Inc., the leader in the energy-bar category. Unilever instantly captures 45 percent of America's nutritional supplement market with April's $2.3 billion acquisition of SlimFast Foods Co.
Following up its November purchase of soy-substitute manufacturer Worthington Foods for $307 million, Kellogg purchases La Jolla, Calif.-based Kashi Co., a maker of natural cereals, in August for an estimated $60 million.
The uneasy amalgam of 1997's merger of Guinness and Grand Met, Diageo is taking a giant step toward fortifying its position as the world's premier alcoholic beverage marketer with the sale of Pillsbury to General Mills and the partial sell-off of its Burger King division. Much of the $6 billion-plus in proceeds is expected to buttress Diageo's bid for the spirits business of Seagram.
Noting the bullish U.S. market for food company sales, London stock analysts gave a spirited thumbs-up to the Pillsbury sale. Though it cut its losses significantly in the most-recent fiscal year, Pillsbury suffered net losses of $371 million the last two years, according to Diageo. Beer and spirits profits, on the other hand, are up 15 percent, with leading brands such as Johnnie Walker, Smirnoff and Jose Cuervo driving much of beverages' growth.
Diageo commands 23 percent of the global spirits market, so it's no surprise that Guinness marketer Paul Walsh recently was elevated to group chief executive in a management shakeup that also saw James Blyth replace former chairman Anthony Greener. Walsh's first priority will be securing the rights to some or all ofhe Seagram brands, which include Captain Morgan rum and Absolut vodka. An acquisition could boost Diageo's global share to more than a third of the market, three times that of closest rival Allied Domecq plc.