New York / NY. (fr) The most significant threat to the credit profiles of companies in the global packaged food industry is higher leverage resulting from debt financed acquisitions, according to Fitch Ratings.
These acquisitions remain tempting in the low interest financing environment. Bolt-on acquisitions in core categories that are margin- or growth-enhancing, particularly in emerging markets, are likely to continue in 2014. The private label market remains fragmented and will likely continue to consolidate.
In October 2013, press speculation associated Nestle with a 17 to 22 billion EUR takeover offer for Italian confectionery company Ferrero, which Ferrero has publicly denied. While major takeovers require a willing seller and are difficult to predict, Fitch expects European companies to continue to look for mid-sized bolt-on opportunities in developing markets and several major industry players to improve their portfolios by divesting additional non-core assets.
Following several divestments, Unilever could look at exiting some slow-growth categories such as its dressings and spreads business. Nestle also shed its Jenny Craig (excluding France) to North Castle Partners and is assessing other under-performing businesses for potential divestitures. The company said this week it would sell its ten percent stake in Givaudan SA.
Most companies in the sector are not likely to engage in large scale M+A. Many ratings are already a bit stretched and near the low end of investment grade due to spin-off or acquisition activity in the past year or two as well as slower than anticipated growth. Large debt-financed acquisitions or LBOs would result in downgrades.
The Hillshire Brands Company, however, could be open to large acquisitions. Modest transactions concurrent with a prudent level of dividends and share repurchases have been factored into the firm´s «BBB/Stable» rating. Hillshire has many attractive characteristics including a relatively small enterprise value of 4,7 billion USD, low leverage, a high cash balance and a streamlined protein centric portfolio with good cash flow. Consequently, Fitch believes Hillshire could be ripe for a takeover, including a leveraged transaction, if the company continues to maintain low leverage.
Packaged food companies´ customers are also consolidating, as evidenced by this week´s announcement that Sysco is acquiring US Foods in an approximately 8,2 billion USD transaction uniting the two foodservice providers. This will likely increase their bargaining power as a large private label food purchaser.
