By Bill Peters
TD Cowen analysts say food-industry megamergers haven’t worked
With Kraft Heinz Co. reportedly considering a breakup of its business, some analysts believe more of its food-industry peers should do the same.
TD Cowen analyst Robert Moskow, in a research note on Monday, said the company’s (KHC) potential split underscores his view that megamergers in the food industry often haven’t worked out. He added that companies that focused more deeply on specific products did better than those aiming for a wider range of offerings.
“The skill set and investment requirements to succeed in disparate parts of the grocery store (e.g. refrigerated, frozen, shelf-stable and snacks) tend to differ,” he wrote.
Moskow added: “We believe that food companies with focused portfolios and category leadership (e.g. Hershey (HSY)) have a better chance of long-term success than diversified companies trying to leverage operating and marketing capabilities across a wide range of categories.”
Moskow made the remarks after the Wall Street Journal on Friday reported that Kraft Heinz was planning to spin off a big portion of its grocery segment, including many Kraft items. Another company would oversee sauces and spreads, the Journal said.
In response, Kraft Heinz – which sells Kraft Mac & Cheese, Heinz Ketchup, Oscar Mayer meats, Philadelphia Cream Cheese and other products – said it has “been evaluating potential strategic transactions to unlock shareholder value,” but didn’t comment further. Shares were up more than 2% on Monday.
Kraft and Heinz merged in 2015, in a deal coordinated by Warren Buffett’s Berkshire Hathaway Inc. (BRK.A) (BRK.B) and private-equity firm 3G Capital Partners. But the combined company has since faced competition, including from higher-end brands, as well as the rising popularity of options geared toward health-conscious consumers. Meanwhile, GLP-1 weight-loss drugs have also reshaped how some people think about their diets.
Moskow, in a note from April, said that the big food companies whose products line most grocery-store shelves raised their prices too much through the pandemic, while sacrificing quality and opportunities to offer more “premium” fare.
In Monday’s note, he called out other companies that might be better off separating or otherwise shuffling around the brands they already own. He said he would rather see more of that reshuffling than mergers to rein in costs.
“PepsiCo (PEP) and Campbell’s (CPB) strike us as the companies with the best opportunity to create value by splitting up,” he wrote. “Utz Brands (UTZ) would be a good combination with Campbell’s Snacks, in our opinion. Clorox’s (CLX) Hidden Valley Ranch brand belongs in the hands of a food company, not a bleach company from our perspective.”
“Conagra (CAG) and General Mills (GIS) both need to continue to shed brands, in our view,” he added. “Perhaps there is more news to come on these fronts.”
Elsewhere in the food industry, privately owned Mars Inc. wants to buy Kellanova (K), which owns snack foods like Cheez-Its, Pringles and Pop Tarts. In 2023, Kellanova, which was formerly known as Kellogg, broke off its North American cereal business into WK Kellogg Co. (KLG) This month, WK Kellogg – which makes Corn Flakes and Froot Loops – agreed to be acquired by Ferrero, which makes Ferrero Rocher candies and Nutella.
CFRA analyst Arun Sundaram on Monday also said more food companies could follow in Kraft Heinz’s path, assuming a separation occurs.
“Given ongoing sales softness and lackluster equity valuations across the industry, more packaged-food companies may pursue similar strategies to accelerate value creation, especially given limited visibility into when volume sales will return to growth,” he said.
“While high prices remain a key factor behind the ongoing volume softness, other forces may be at play as well, including the impact of weight-loss drugs (e.g., GLP-1s) and a broader consumer shift toward healthier food choices,” he continued.
-Bill Peters
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