Prepared Foods: Merger Roulette - Pillsbury and other potential food industry takeover targets

First, Unilever bought Slim-Fast for $2.3 billion and Bestfoods for $24.3 billion. Then, to expand its Kraft business, Philip Morris acquired Nabisco for $18.9 billion. So, you ask, who's next?

The most likely candidate appears to be Pillsbury, the $6 billion food unit of British-based Diageo. After failing to add to its food portfolio, Diageo appears ready to unload the Doughboy. (See Global 150 Food Companies Report beginning on page 14.)

Some of the suitors being bantered about include General Mills, Sara Lee and Heinz. Unfortunately, Pillsbury isn't a great match for any of these companies. And Heinz appears to be a takeover target itself. In addition, the price tag for Pillsbury might exceed $10 billion, which would be hard to swallow for these food companies.

Maybe a deal among several buyers would work out best. For example, a joint bid by Earthgrains, Nestle and Agrilink could send Pillsbury's refrigerated dough business to Earthgrains, its Haagen-Daz ice cream to Nestle and its Green Giant brand to Agrilink. Or, Nestle could buy the whole enchilada (Pillsbury owns Old El Paso) and sell off what it didn't want.

In any case, Pillsbury is an attractive food company with a proven track record in new product development, aggressive marketing and outsourced manufacturing. Someone will grab this gem at the right price.

Another company that might be ripe for the taking is Ham Celestial Group, which will rack up sales of about $430 million in 2000 on a pro forma basis. Since it already owns nearly 20% of Hain and counts natural/organic as one of its core food categories, Heinz may the most logical buyer.

However, the natural foods market--with its double-digit growth rate--is on the radar screens of most multinational food conglomerates. Hain would likely draw interest from many companies.

Now that it's spun-off its battery business, Ralston Purina may be a takeover target. Nestle, makers of Friskies and Alpo pet foods, appears to be a potential partner.

After losing out to Kraft for Nabisco's biscuit business, Danone may be on the prowl for another cookie & cracker manufacturer--namely, Keebler Foods. The No. 2 cookie and cracker company in the U.S., Keebler is owned (55%) by Flowers Industries.

Cadbury Schweppes, who also got bested by Kraft, is aching to add to its confectionery business. With money to spend from its soft drink sale to Coke, the company's top choice would be Hershey Foods. It's also eyeing the Adams confectionery business of Warner-Lambert, which was bought by Pfizer in February. Adams confectionery rung up about $2 billion in revenues in its latest fiscal year.

For years, analysts and pundits have been calling for Procter & Gamble to either beef up or unload its food business, which garnered nearly $4.4 billion in sales in '99. With internal troubles, P&G might be willing to shed its food business. However, its combination of snacks (Pringles), coffee (Folgers & Millstone), oils & shortenings (Crisco), peanut butter (Jif) and drinks (Sunny Delight) limits the number of potential buyers.

Kellogg and Quaker Oats have been rumored to be engaging in merger talks. Although each company's grain-based foods would be complementary, Quaker's Gatorade unit might be better paired with a beverage king like Coke, Pepsi or Cadbury Schweppes. Any Gatorade sale also would probably attract the attention of bottled water titans Nestle and Danone.

Virtually every food manufacturer has sat down at the banquet table of mergers. A couple of companies will do the carving, some will taste and sip, and a few will end up as the main course.