Buffett-Heinz Deal Sends Urgent Warning To Food Industry To Cut Costs

Warren Buffett, chairman and CEO, Berkshire Hathaway, Inc., arrives at the Allen & Company Sun Valley Conference in Sun Valle
Warren Buffett, chairman and CEO, Berkshire Hathaway, Inc., arrives at the Allen & Company Sun Valley Conference in Sun Valley, Idaho, Friday, July 13, 2012. Buffett remains happiest while hunting for deals like the $23.3 billion acquisition of the maker of Heinz ketchup his company announced Thursday, Feb. 14, 2013, it will be helping finance. So Berkshire shareholders can set aside the idea that the Buffett, 82, might retire someday even if he did undergo prostate cancer treatment last summer. Buffett enjoys what he does as Berkshire's chairman and CEO far too much.(AP Photo/Paul Sakuma, File)

By Martinne Geller

BOCA RATON, Fla., Feb 22 (Reuters) - The $23 billion buyout of H.J. Heinz by Warren Buffett and private equity put food executives on notice: start showing better results or risk being left behind.

The deal, and the ripples it creates in the sector, was the buzz of the consumer industry's annual get-together in Florida this week, sponsored by the Consumer Analyst Group of New York.

In private discussions overlooking a yacht-filled marina or in the hallway between the Nespresso table and the Coca-Cola Freestyle machine, the consensus among executives, analysts and investors was clear: gear up for a new era of belt-tightening, if not more acquisitions and divestitures, in the sector.

"This is the first large deal in years by a financial buyer that calls out the lackluster fundamentals in the U.S. packaged food space," said Robert Dickerson, an analyst with boutique firm Consumer Edge Research.

Industry veterans are already beset by anemic sales growth and margin pressure, thanks to weak economies in Europe and the United States, changing consumer demographics, volatile commodity costs and competition from lower-cost rivals.

Some of the principals of 3G Capital, Buffett's partner in the Heinz deal, were also behind the rise of AmBev, a Brazilian brewer, into the world's largest beer maker, Anheuser Busch InBev. Expansion and cost-cutting were hallmarks of their strategy, and the industry expects it to be the same here.

It is unclear what, if any, other targets 3G might have in mind. Campbell Soup has long been seen as a good candidate, though roughly half of its stock is controlled by heirs of John Dorrance, who invented condensed soup.

Campbell Soup Chief Executive Denise Morrison declined to comment on a potential merger with Heinz, but she did say the news put her on guard.

"For me, it's a heightened signal that I've got to be even more aggressive about costs," she said in an interview. "Campbell is always looking for ways to create better productivity and I think this is a good call to action."

Campbell has already been cutting costs, including by closing factories, as it works to turn around its sagging U.S. soup business.


Given its news, Heinz canceled its presentation at the annual conference. But that did not stop the chatter.

"Any time there's a deal, everybody wonders if it's a catalyst to other deals and that remains to be seen," said Irene Rosenfeld, CEO of Mondelez International, who last year oversaw the spin-off of Kraft Foods Group. She told Reuters that companies with "good strategic planning" pay more attention to their own circumstances than what happens outside.

ConAgra Foods Inc CEO Gary Rodkin, who just acquired private label food maker Ralcorp, said deal momentum could now pick up, if 3G buys more companies or if other companies get inspired by the Heinz deal.

"It just could be the mentality is, 'that's how we're going to create more shareholder value in this industry'," Rodkin said in an interview.

There has already been a wave of much smaller transactions in the food industry, with the split ups of Sara Lee into Hillshire Brands and D.E. Master Blenders, Kraft into Kraft Foods Group and Mondelez International, and Fortune Brands into Fortune Brands Home & Security and Beam Inc.

In addition, there was Canada's Saputo buying Morningstar from Dean Foods and Kellogg buying Pringles from Procter & Gamble.

Packaged food is a "business that rearranges the furniture a lot," said Campbell's Morrison. Many other top executives at the conference, including Hillshire's Sean Connolly and Clorox Co's Don Knauss said they were open to "bolt-on" acquisitions.


Late on Thursday, Heinz reported third-quarter earnings and said it would divest Shanghai LongFong Foods, a frozen food business in China. It said it anticipates securing a deal with a suitable buyer in the next 12 months.

Analysts said other divestitures could follow, as 3G reviews the Heinz portfolio which spans Ore-Ida frozen potatoes to baked beans.

"It seems equally likely that this could spur divestitures as well as acquisitions," said Moody's analyst Brian Weddington. He said other frozen food businesses, which include Smart Ones frozen entrees, might be candidates, since they have been challenging for Heinz.

But one issue that could stand in the way of more merger activity is the high asset prices sellers are seeking, since cheap financing tends to lead to lofty valuations, said General Mills Chief Financial Officer Don Mulligan.

"We've seen that both for brands we looked at in the U.S. and in emerging markets," Mulligan said. "There's a lot more reasons deals can fail than they succeed."



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