The packaged food industry is bracing for a potential mega-deal not seen since the 2015 merger of Kraft Foods and HJ Heinz.
Markets responded positively to the news over the weekend that Mars is interested in acquiring the US snacks giant Kellanova, as reported by two major media outlets.
Kellanova shares surged more than 19% in pre-market New York trading on Monday (5 August) and maintained double-digit gains throughout the day, closing 16% higher at $73.20, despite a wider stock market downturn amid US recession concerns.
The reaction might have been substantial for Mars as well, if not for the fact that the snacks, confectionery, and pet-food business is privately owned. Mars is no stranger to acquisitions, having struck several recent deals, but an approach for Kellanova would likely draw the attention of US competition regulators.
A merger would create a business with annual sales revenue of at least $60bn. While Mars typically does not disclose its financial figures, the Snickers and Skittles brand owner reported in 2022 that it generates nearly $45bn in net sales. Kellanova reported $13.1bn for fiscal 2023, taking into account the complexities of the spin-off from Kellogg.
It’s perhaps unsurprising that Kellanova might be a buyout target following last year’s split from Kellogg, focusing on snacks, frozen foods, noodles, and breakfast cereals outside of North America.
After all, the Special K brand owner had put its MorningStar Farms plant-based business up for review and potential sale before deciding to keep it. North America cereal is now managed by WK Kellogg, the other entity that emerged from the group spin-off.
It was also timely PR for Kellanova last Thursday, as the Pringles and Cheez-IT snack brand owner raised its sales and EPS outlook for the year. Three days later, the acquisition rumours surfaced.
Valuation Bets
Potential valuations for Kellanova are equally substantial if a deal is struck, dwarfing the amounts Mars has paid for US businesses such as Kevin’s Natural Foods, Trü Frü, and Nature’s Bakery – the latter acquired through another deal, Kind snacks.
Sources for The Wall Street Journal suggested a price tag of up to $30bn, far exceeding another significant industry deal – JM Smucker’s purchase of US indulgent snacks maker Hostess Brands last year for $5.6bn.
Analysts at AllianceBernstein, led by Alexia Howard, suggested such a valuation might be low given Kellanova’s current enterprise value of $27.8bn.
“This seems low since this would imply less than a 10% premium to the current share price,” Howard wrote.
“We’d likely expect a somewhat higher valuation – at minimum a 15-20% premium to the current stock price and potentially more like a 25-30% control premium might materialise, particularly if Mars wishes to deter other potential acquirers from stepping in.”
Reuters’ sources suggested that ‘another suitor could also approach Kellanova’, although they added there is no certainty a deal would be reached with any party.
Howard, however, doubted this scenario, especially if other US heavyweights in similar categories showed interest due to regulatory competition barriers.
“As a global snacking company, Mars makes sense as a potential suitor, and there really aren’t many other companies on the list,” Howard said.
“PepsiCo would likely have too many anti-trust issues given its global salty snacks presence. And the only other sweet snacking company with a global footprint would be Mondelez, but we think it unlikely that the management team at Mondelez would be interested in pursuing such a large-scale deal.”
Howard and the AllianceBernstein team also contended that an approach by Mondelez for Kellanova would complicate any potential future snacks business combination with PepsiCo, if such a move ever materialised.
“We have long thought that a merger between Frito Lay and Mondelez would be the ultimate global deal to merge salty and sweet snacks, which would be thwarted by Mondelez buying Kellanova since it would create anti-trust problems for any future deal with PepsiCo,” she said.
Consolidation Murmurs
The excitement around the proposed Mars takeover talks has spurred speculation of further consolidation in the packaged food industry, particularly as sentiment improves in the global investment landscape.
Robert Moskow, an analyst at TD Cowen, commented on the potential for increased consolidation in the wake of the Mars-Kellanova talks.
“We believe that Kellanova’s portfolio of popular snack brands will fit well with Mars’ and help them expand scale in international markets,” Moskow wrote.
“The merger could usher in another cycle of consolidation in the packaged foods space similar to 1999-2001, thus providing a boost to valuations.”
Similarly, analysts at Stifel suggested that a Mars-Kellanova deal could pave the way for more food industry M&A as a means to boost growth in the current era of diminishing pricing power, with the focus shifting to volume recovery.
“We believe the pipeline for potential M&A of packaged foods businesses is very full, however we have seen relatively few transactions over the past two years,” the Stifel team wrote.
“With strong balance sheets across the industry, we believe companies will continue to use M&A and divestitures to improve the growth profile of their portfolios.
“With a limited number of completed transactions, we believe valuation spreads remain wide, with a focus on upcoming potential deals to break the dam.”
AllianceBernstein’s Howard agrees, noting that a potential Mars-Kellanova merger “could have broader implications for consolidation across the packaged food space”.
She added: “It’s possible that a deal of this magnitude could attract more activist investor interest in pushing for further consolidation across the packaged food space, since US food remains a far more fragmented space than other staples sectors in the developed markets.”
“Juggernaut Brands”
Howard suggested that a Mars-Kellanova deal would “seem to make strategic sense” following the spin-off into a more snacks-centric company.
“It’s perhaps not surprising that Kellanova may have become an acquisition target since it shed its poor-performing North American cereal business last autumn, since it is now a more attractive company with a more global footprint and far higher exposure to snacking.”
From Mars’ perspective, she said Kellanova’s snacks business would be a good fit, although Mars’ recent acquisitions have tended to focus on the healthy snacking segment rather than salty varieties like Pringles.
Nevertheless, Howard added, “the possibility of acquiring juggernaut brands like Pringles and Cheez-It is probably what has drawn Mars to the negotiating table”.
The Stifel team suggested a merger would create a powerhouse across food segments like pet products and snacking, while also bolstering geographic presence.
Mondelez, for instance, generated sales of $36bn in its 2023 financial year, more than triple Hershey’s $11.1bn. PepsiCo is far larger given its soft drinks business, posting total group revenue of $91.4bn. Its Frito-Lay snacks division in North America contributed $24.9bn.
“We believe a transaction would further validate the power of Kellanova’s brands and growth potential, both in North America and internationally,” the Stifel team said.
“The transaction would combine Mars’ snacking and pet-oriented portfolio with a scaled snacking business in North America and Europe. Kellanova operates across several temperature states in North America, providing further scale for Mars’ existing food and pet brands.”
