Category: Consumer Products

Magnetic 40: Food Processors

Before 1989 one U.S. company dominated the international market for breakfast cereal—and it wasn’t General Mills. “Kellogg was kicking everybody’s rear end overseas,” admits Ken Harris, partner and industry consultant at Cannondale Associates.

Rather than try to build an international cereal business from the ground up, General Mills found a partner: Nestlé. The joint venture, known as Cereal Partners Worldwide (CPW), combined General Mills’ expertise in cereal with Nestlé’s brand recognition and distri-bution throughout Europe.

The strategy worked. Since forming, CPW has expanded operations to 75 markets and captured 21% of the international cold cereal business. “The equation is pretty simple,” explains Cannondale’s Harris. “They find value in a partner’s assets, send their best people to run the company and stay vigilant as to how to improve the partnership on an ongoing basis.”

Not all of General Mills’ international joint ventures have gone as smoothly. Analysts say the firm has had disagreements with PepsiCo over strategy regarding Snack Ventures Europe, a joint venture with $1 billion in annual sales. General Mills also shut down a Latin American dessert venture with Best Foods.

Still, international alliances alone accounted for $825 million of the company’s $6.7 billion in sales last year.

Full story at Forbes.com

Stock Focus: Food Processing Companies

NEW YORK – Within the past 12 months General Mills anted up $10.5 billion to buy Diageo’s Pillsbury food unit, European food and consumer products giant Unilever spent $21 billion to gobble up Bestfoods, and Philip Morris dropped $15 billion for Nabisco.

What’s going on here?

“To stay competitive in the food business, you need a broad array of market-leading products in growing, on-trend categories,” says Romitha Mally, packaged foods analyst at Goldman Sachs. “Size gives a company muscle with retailers,” adds David Nelson of Credit Suisse First Boston.

The enterprise multiple is a good guideline for what acquirers pay for food companies. The enterprise value of a company–the market value plus total debt and the liquidation value of preferred stocks minus cash and equivalents–represents the minimum price an acquiring firm must pay to buy another publicly traded company. The enterprise multiple is the ratio of enterprise value to a company’s operating income, or earnings before interest, taxes, depreciation and amortization.

Unilever (nyse: UN – news – people), for example, paid an enterprise multiple of 14 for Bestfoods (nyse: BFO – news – people). Using that deal as a guideline, we sought out food companies with enterprise multiples of 14 or less. All the companies on our list are profitable, trade below their 52-week highs, carry estimated 2001 price-to-earnings ratios below 22 and have projected three- to five-year earnings growth of 10% or higher.

Full story at Forbes.com