Food company savings plans ratchet up PE competition: Moody’s

Private equity firms targeting packaged foods acquisitions could run into heavier competition as large food companies free up cash for add-on businesses, Moody’s Investors Services senior credit officer Brian Weddington told Agri Investor. 

In a report Moody’s published Thursday, Weddington discussed aggressive cost-cutting by Kraft Heinz Company, Mondelez International, General Mills, Campbell Soup Company and the Kellogg Company. In the face of shifting consumer demand, these companies are freeing up cash through streamlining manufacturing and distribution processes, organizational restructuring and, in some instances, cutting product lines and branding efforts.

Highlighting General Mills’ acquisitions of Annie’s organic foods and meat snacks provider EPIC Provisions in the report, Weddington told Agri Investor that opportunities for private equity investors examining similar deals could be eroding.

“Many of these large [food] companies are already picking the low-hanging fruit,” he said. “Private equity firms that are interested in a similar strategy may accelerate those plans while there is still some upside in these companies.”

Private equity acquisitions targeting the types of healthy packaged foods companies Moody’s expects large food companies to focus on include Graham Partners’ purchase of Mercer Foods, Pulmone’s acquisition of Vitasoy and Clearlake Capital’s purchase of That’s How We Roll.

The Moody’s report points to 3G Capital-backed Kraft Heinz as having been the most aggressive in its recent cost-cutting. It describes how Kraft Heinz’s “zero-based budgeting” program is expected to bring $1.5 billion in cost savings through 2017 and has helped lead to a reduction in leverage from 4.8x at the time of the 2015 merger to below 4.0x today.

“Even if the company pursues another major acquisition, Kraft Heinz should have sufficient access to debt and equity capital markets that would allow it to preserve its investment grade portfolio if it so chooses,” Weddington wrote.

The report concludes that while cash-flow growth for large packaged food companies is expected to be the strongest in three years during 2017 as a result of the cost-cutting, sagging sales will challenge the companies’ ability to maintain resulting savings.

“Even the most aggressive cost-cutting programs have limits,” Weddington wrote. “When companies generate savings from cuts in product lines or brand support, this can trigger deeper-than-expected declines in sales volume that leads to price cuts. This, in turn, can offset the cash benefit from cost savings, even as profit margins rise.”