Is Further Consumer Staples Consolidation Coming?

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Warren Buffett has done it again.  His Berkshire Hathaway (NYSE: BRK-B) has, in his terms, ‘bagged another elephant’.  In February, it was revealed that Berkshire and a Brazilian private equity firm would be purchasing Heinz (NYSE: HNZ) in a deal worth $23 billion.  Investors may be wondering if this signals a turnaround for mergers and acquisitions.  In a recent segment on CNBC, Jim Cramer claimed that we are now in a state of ‘merger mania’, and that the corporate confidence needed to revitalize the M&A market is back.  Is he right?  And, if so, are there other stocks within the consumer staples sector ripe for the plucking?

Corporate cash sitting idle

Thanks to the Federal Reserve’s extremely easy monetary policy, interest rates are at historic lows.  The economic recovery in the United States continues to trudge along at a painfully slow pace.  As a result of the Great Recession, companies cut workforces to the bone and are still only hiring at a selective pace. 

Consequently, profits sit on the balance sheets of corporate America and provide little in return.  It’s been well-publicized that companies in the United States are sitting on a trillion dollars of cash that is earning them almost nothing.  Therefore, the best use of cash to provide shareholders return seems to be returning it in the form of dividends and share buybacks, and in the case of slow-moving conglomerates like Berkshire Hathaway, making big acquisitions.

Heinz represents a lot of what Warren Buffett has publicly said he favors for Berkshire's investments.  The company provides its namesake ketchup and other food brands; Heinz’s products could likely be found in virtually every household in America.  The company pumps out reliable cash flows and an ever-increasing stream of dividends.  It’s a powerful brand name with a long history of success.  At the same time, it isn’t the only one to have these qualities within the consumer staples sector.  Here are two candidates that share many of these characteristics and may be attractive to not just Berkshire Hathaway, but also one of the consumer staples giants.

Two possible candidates

Campbell Soup (NYSE: CPB) rallied since the Heinz takeover announcement, and its shares now sit at five-year highs.  The maker of its namesake soups, as well as Prego pasta sauce and Pepperidge Farm cookies, holds a $12 billion market capitalization and could be well-positioned for a takeover, considering its remarkable consistency and operating history of more than 140 years.

A plausible alternative could be Hormel Foods (NYSE: HRL).  Hormel could be a nice bolt-on acquisition, as the company holds a market capitalization of only $9 billion and a portfolio of well-established brands. Hormel was founded in 1891, and has since sold its flagship Spam and Hormel Chili to consumers. However, the company has broadened its product portfolio over the years. Hormel has achieved strong annual earnings per share growth of 11% annually since 2007, and annual sales growth of 6% over the same period.

The bottom line

Whether we’re entering a new golden age for mergers and acquisitions is unclear.  Investment banking activity has resumed to a significant degree, and with boatloads of cash sitting on corporate balance sheets, it’s certainly possible that Jim Cramer and others are correct.  All that cash earning nothing for shareholders could be better served being used to make accretive acquisitions. 

Warren Buffett recently stated that he's ready to make even further acquisitions to add to his Berkshire Hathaway portfolio.  Both Campbell Soup and Hormel have qualities in common with Heinz—namely, long histories of success, well-known and powerful brands, and consistent cash flow generation.  Each could be an interesting target for either Berkshire or a consumer staples giant, and it’s worthwhile for investors to keep an eye on going forward.


Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and H.J. Heinz Company. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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