If recent events are any clue, M&A activity appears to
be heating up on Wall Street. That's no surprise: Shares of
smaller companies still trade below 2007 valuations, and
cash-rich industry giants are searching for ways to outgrow
sluggish economies.
Lately, the tech and pharma sectors have been grabbing
headlines, with acquirers including
Abbott Labs (NYSE: ABT),
Dell (Nasdaq: DELL), and
Cisco (Nasdaq: CSCO). But there's another
sector in which M&A action looks poised to take off:
consumer staples.ÂÂ
Buying growth
True, this sector generally lacks the cash-bloated
balance sheets of large-cap tech and pharma. But staples
companies
areknown for their stable cash flows and steady
share prices, which means that the big boys of the sector can
raise funds by issuing shares or low-rate debt. Kraft
investors are familiar with this equation. The $40-billion
mac-n'-cheese-maven is
currently pursuing$17.6 billion Cadbury, prepared to
bankroll the acquisition with a mixture of existing cash plus
new debt and shares.
Whether or not that particular deal pans out, the industry
appears ripe for consolidation. At least, that's what
Unilever (NYSE: UL) CEO Paul Polman recently
said, not long after the basic-goods giant
snapped upthe personal-care brands of
Sara Lee . Polman's forecast makes sense;
with the outlook for U.S. and Western European consumers
uncertain, companies are eager to expand their product
portfolios and push deeper into developing and emerging
markets.
What might sector M&A activity look like? In the table
below, I've listed companies that boast a portfolio of
strong, market-leading brands, all wrapped up in a digestible
enterprise value:
Company
Enterprise Value
Current Share Price
2007 Share Price *
2007 / TTM OCF per Share
% International Sales
H.J. Heinz (NYSE: HNZ)
$17.7 B
$41.15
$46.68
$3.18 / $3.71
60%
Clorox (NYSE: CLX)
$11.0 B
$59.40
$65.17
$4.47 / $5.15
20%
Hershey
$11.1 B
$39.57
$39.40
$2.27 / $2.50
14.4%
Sara Lee
$9.8 B
$11.68
$16.06
$1.32 / $1.23
45.5% **
Data current as of Oct. 22. Sources
include Yahoo! Finance and company reports.
* Year-end price.
** Includes brands the company has agreed to
divest.
Except for Sara Lee, each company has boosted operating
cash flow since 2007, yet their shares trade mostly lower.
For a deep-pocketed competitor on the prowl, that's an
appealing combination.
Assuming that potential bids would come from companies
within the sector, the list of potential acquirers is
limited.
Company
Market Cap
Total Debt
Interest Coverage
Unilever Continued... |