PepsiCo. Inc.'s purchases of Quaker Oats Co. (Gatorade) and South Beach Beverage Co. announced with a splash its entrance into the sports and nutritional beverage markets.

While R&D labs search for the next PowerBar and ad agencies struggle to find another "Whassup," U.S. food executives are finding that the easiest way to raise revenues and value is by buying them. For the 12 months ended June 1, 2001, the value of food industry mergers topped $69.2 billion, according to Los Angeles-based Mergstat, a global merger and acquisition information firm. To put that number in perspective, for the five preceding years, the value of all food industry mergers combined totaled only $50.1 billion.

Major food companies are on an acquisition spree not seen since the deal-happy 1980s, but unlike the Reagan years (where agreements were consummated for the sake of the big getting bigger) these deals are more strategic. The current run of M&As are based on the principles of placing a company in faster-growing, complementary food categories, expanding in geographic areas where they are weak, and positioning themselves better to counter consolidation on the supermarket side of the business that has given even more clout to retailers.

"Today, people obviously are acquiring to get bigger, but the mergers are more to wield strength with respect to retailers and maintain shelf-space. It is a different rationale today. Companies are getting bigger to defend brands," says Ben Buettell, managing director at investment banker Houlihan Lokey Howard & Zukin, Los Angeles.

Just look at the biggest deals of the past 12 months. General Mills Inc.'s acquisition of the Pillsbury operation from Diageo Plc. was practically a necessity for the Minneapolis packaged food company to compete with the burgeoning size of Kraft Foods Inc. (pumped up to new heights with last year's purchase of Nabisco Holdings) and Nestlé Inc. The deal made General Mills the third biggest food manufacturer in the U.S. and is expected to send a jolt of innovation to Pillsbury's stale new product development business.

PepsiCo Inc., drooling to get a foothold in the booming nutritional beverage market, established an instant presence by buying rebel beverage firm South Beach Beverage Co. at the end of October 2000. The purchase might have been bigger news had the soft drink and snack giant not acquired the Gatorade brand with its purchase of Quaker Oats Co. a month later, pending approval by the Federal Trade Commission. The deals suddenly gave Pepsi the leadership position in a category that had been passing it by.

The merger of Suiza Foods Corp. and Dean Foods Co. achieves "the virtual completion of our national geographic footprint," says Gregg Engles, Suiza's chairman and chief executive officer. Not since the glory days of Borden Inc. has a dairy processor approached such nationwide coverage. The deal should provide operating efficiencies of $60 million the first year and $120 million after three years.

What the Mergers Mean

People want their food fast. Kellogg Co. has been hit hard by consumers eschewing tradition breakfast cereal for grab-and-go snacks. While the company has had great success with its convenience food division, the purchase of Keebler Foods Co. in October 2000 extends its snack penetration even more.

Besides the Gatorade brand, Pepsi will also get in Quaker a line of breakfast snacks to complement its dominant Frito-Lay business. The merger creates a company "with exceptionally strong position in the rapidly growing market for convenient foods and beverages," Pepsi says.

Looking to counter the Pepsi strategy, arch rival Coca-Cola Co. inked a deal with Procter & Gamble Co. in February to form a jointly owned but separate operating company that gives Coke a snack presence and Procter & Gamble a much wider distribution scope for products like Pringles and Sunny Delight. That venture, however, is still in the planning stages.

However, the deals are not all blue skies and lollipops. While analysts have generally praised the actions taken by food manufacturers to boost business, Wall Street investors have not been as eager. Through the first six months of 2001, practically all of the biggest U.S. food companies have seen their share prices tumble: Quaker, -1.5%; General Mills, -3.7%; Hershey Foods Corp., -5.3%; H.J. Heinz Co., -9.3%; Campbell Soup Co., -17.0%; Sara Lee Corp., -21.3% and ConAgra Foods Inc., -22.1%. Kellogg stands above the rest by merely posting a 0.6% gain.

In addition, a couple of the highly touted acquisition announcements are running into rough waters. Philip Morris has been planning to spin off Kraft since last year's acquisition, but analysts fear the uncertainty in food sector stocks--combined with possible residual effects of tobacco lawsuits-- might make the IPO waters a little rough. Also facing uncertainty is the Pepsi/Quaker deal, now being delayed by antitrust discussions with the Federal Trade Commission, that are expected to continue into the third quarter.

The next 12 to 24 months will see a slowdown in merger activity due, in part, to the economy but also because manufacturers need time to analyze the deals they have made.

"On the back of merger activity, you see a lot of divestiture activity. Now we are starting to see larger companies spin off non-core businesses and slower-growth brands. There will be internal reviews--companies questioning what to keep and improve and strengthen and what to get rid of," says Buettell. "There is still going to be M&A activity, but the number of larger deals will slow down as a result of the digestion, or perhaps indigestion, companies will go through." PF

PREPARED FOODS TOP 100 PUBLIC & PRIVATE U.S./CANADIAN FOOD & BEVERAGE COMPANIES
Ranking is based on 2000/2001 food & beverage sales. All figures in millions of U.S. dollars.

Sales Operating Income

na = Not Available * = Prepared Foods Estimate

¹ = Net Income

PREPARED FOODS TOP 100 PUBLIC & PRIVATE U.S./CANADIAN FOOD & BEVERAGE COMPANIES
Ranking is based on 2000/2001 food & beverage sales. All figures in millions of U.S. dollars.  

Sales Operating Income

na = Not Available * = Prepared Foods Estimate

¹ = Net Income

TOP 50 GLOBAL FOOD & BEVERAGE COMPANIES
Ranking is based on food & beverage sales in millions of U.S. dollars. Does not include U.S. and Canadian companies.

na = Not Available * = Prepared Foods Estimate

¹ = Operating Profit

"Today, people obviously are acquiring to get bigger, but the mergers are more to wield strength with respect to retailers and maintain shelf-space. It is a different rationale today. Companies are getting bigger to defend brands."