Fitch: M&A Significant Threat to Global Packaged Food Industry

NEW YORK--()--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 EUR17 billion-EUR22 billion 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 underperforming businesses for potential divestitures. The company said Monday it would sell its 10% 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 spinoff 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 Co., 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, 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 Monday's announcement that Sysco is acquiring US Foods in an approximately $8.2 billion transaction uniting the two foodservice providers. This will likely increase their bargaining power as a large private label food purchaser.

For more information on this topic, please see our special report titled, "2014 Outlook: Global Packaged Food," which is available on our Website www.fitchratings.com

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research:

2014 Outlook: Global Packaged Food (Companies Continue to Combat Slow Growth with M&A, Cost Cutting)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724171

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Senior Director
Corporates
+1-312-368-2077
or
Giulio Lombardi
Director
Corporates
+39 02 8790 87214
or
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Contacts

Fitch Ratings
Judi Rossetti, CPA/CFA
Senior Director
Corporates
+1-312-368-2077
or
Giulio Lombardi
Director
Corporates
+39 02 8790 87214
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212 908-9123
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com