Friday, December 17, 2010

Deal Frenzy in Aisle 4

From CNN Money. Yes, this is an article about grocery brand mergers and acquisitions. Why does this concern you? Two reasons: now you know why all the fuss is being made with coupons, and the slow whittling away of choice is happening, as I described here (last 2 paragraphs).

"With improved access to credit and mountains of capital ready to deploy, private-equity and strategic buyers are hot to snap up food companies. Thanks to their stable cash flows, food firms are generally safe bets, especially for highly leveraged private-equity deals where debt repayment is a priority.

There is one complicating factor, however: brands are fading, and the biggest consumer food companies are built on brands. So while there has been buzz about possible buyouts of, for example, Sara Lee (SLE), ConAgra (CAG), and J.M. Smucker (SJM), there has been no reported movement toward a deal for any of them.

Even before the recession, private-label (or store brand) products were ascending, taking market share away from branded products. The downturn has only made things better for private labels and worse for many brands as consumers have sought out cheaper fare.

In many cases, those consumers have discovered that private-label products are just as good as the branded ones, or at least close enough. For that reason, some analysts believe that private labels -- which according to the research firm Packaged Facts now make up nearly a fifth of the grocery market, up from just 14% in 2005 -- will continue to eat away at certain brands even after the economy picks up. Once viewed as commodities, private-label products are developing a "brand" of their own. They represent an $87 billion market, Packaged Facts says.

This raises several questions for both strategic and private-equity investors. Should would-be acquirers wait to see how the recovery might affect sales of private-label products? Which brands are most vulnerable to the rise of private labels? Not all brands are the same – many will remain strong for years to come."

And to make matters worse, who do you think owns a majority of the organic labels out there? Yup--the Big Food brands, like Kraft, Heinz, Dole, Del Monte, etc.

Now you begin to understand the method behind the Coupon Queens' madness--they are paid by the big brands to entice you into buying big brands by using coupons in hyper-fashion. Generics and lower price-per-unit foods have won out, and the big brands are flailing around trying to survive, even though they're the makers of the generics.

When a company gets sold to private equity firms, the company is usually a step away from bankruptcy, and private equity is the only thing to save it from default. Witness Burger King, Hardees, Kmart, and Sears--all fell by the wayside, only to be saved by private equity firms. If they don't make a profit for the private equity firms, they get spun back out into bankruptcy, or get merged with another private equity holding, or just dissolved altogether. Rarely do firms get sold back into public domains and return to the stock market.

"Just look at Bumble Bee, the once-venerable tuna brand that has lost its luster over the years. Last month, Centre Partners Management, the tuna company's private-equity owner, sold Bumble Bee to Lion Capital, another PE shop. The price was a reported $980 million, or only about 7.5 times earnings before interest, taxes, depreciation, and amortization. That's well below the valuation of 9 to 11 times earnings that food companies are commanding on average.

In one sense, Centre Partners did well – it got a 250% return on its investment. But Centre could have gotten a better return elsewhere. And just compare this deal to the last time Centre bought and sold Bumble Bee. It purchased the company from ConAgra in 2003 and sold of the last of its stake in 2005. That series of deals netted Centre an 850% return. But the brand has faded since then, and so has the valuation.

Consumers tend to be more brand-loyal to bigger names. And grocers, overwhelmed by the variety of products on their shelves, are more likely to trade out mid-tier brands for their own brands than to stop stocking the best-known products.

Those crowded shelves also have implications on the deal front. Expect more consolidation among makers of private-label products. For retailers, buying products from dozens of private-label suppliers is highly inefficient and costly. Buying from just a handful allows grocers to get the full benefit of making thin-margin private-label products available."


"Consolidation is also happening in private-equity deals. Fieldbrook Foods recently agreed to be acquired by Arbor Investments, which specializes in food and beverage companies. Terms weren't disclosed, but Fieldbrook is the largest supplier of private-label ice cream east of the Mississippi. It got that way by spending the past decade snapping up other companies.

Meanwhile, private equity and strategic buyers are wondering what to do with brands that are being hurt by the rise of private labels. In October, shares of Sara Lee spiked after reports that private-equity firms including Kohlberg Kravis Roberts and Apollo Global Management, perhaps smelling blood in the water, were eyeing the struggling company. But there has been no reported movement on a deal (and Sara Lee says it no longer wants to sell). The stock has continued to rise.

Last month, Sara Lee sold its North American bakery unit to Mexico's increasingly gargantuan Grupo Bimbo for a bargain-basement price of $959 million (it was reportedly hoping for something more like $1.5 billion), signaling that it no longer wanted to compete with private-label bakers.

Bimbo, which has snapped up brands such as Entenmann's and Thomas' English Muffins, is on a mission to get most of its sales from the United States. Through acquisitions, it's getting close.

Whether or not Sara Lee is bought out in whole, such spinoffs of particular units might become a trend if wholesale deals can't be struck. Analysts have said that companies like Sara Lee and ConAgra might not be attractive, but some of their parts surely are."


"Brands that are strong today might, like Bumble Bee, start fading tomorrow. On the other hand, the recovery might send shoppers flocking back to their favorite brands, making some private-label deals less valuable. It will likely be a few years before we know who is making the smartest bets in the grocery store."

Now you see the reason for all the coupon hype--the brands are trying to save themselves any way they can. All the coupon tricks in the world aren't going to get me to buy their overpriced stuff--what happens when the coupons go away, as well as the product choice? It's coming in the form of street markets just like Europe.

These companies HAVE to give away their food to compete with price-per-unit. Those coupons are an indicator of how much you're overpaying for the product. In-store sales are a magnifyer of that overpayment. Put them together, and you get a food company freebie because they can't sell it for a reasonable price--it isn't worth it! They're admitting they can't compete.

Witness all those little KFC/Taco Bell/Pizza Hut combo stores--those are also a private equity conglomeration called Yum Brands. Each brand separately can't compete, but put the three together, and POW! Yum Brands is on the stock market, which means public domain, but each individual INSIDE Yum Brands is a private entity. In other words, they had to put three brands together to make a decent company. The same goes for Sears and Kmart--separately, they each suck on ice, but cobbled together, into Sears Holdings, they do better. I have the feeling that eventually the Kmart name will disappear, leaving only the Sears name in the future.

This is what you can expect to happen with grocery stores and grocery brands. Your choice of stores will dwindle, as will your choice of brands, so you may as well ditch the loyalty before it's taken away from you. Expect to see Kroger-Meier-ShopRite stores, or some mash-up of whatever's in your area in the next decade.


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