The Dakota deal is the third for Post this year

The Dakota deal is the third for Post this year

Post Holdings, the US breakfast cereals group, has been on an M&A spree in the last 12 months. Number three in a stagnant market, Post has added gluten-free cereals and granola to its portfolio. Last month, it snapped up a protein shake and supplement firm. This week, Post moved into pasta. Michelle Russell digests Post's recent deal-making.

The US breakfast cereals group behind brands like Raisin Bran and Honey Bunches of Oats this week made a US$370m move into pasta.

Post Holdings struck a deal to buy Dakota Growers Pasta Co. from commodities giant Glencore Xstrata.

Post CEO William Stiritz said the company was continuing to expand its portfolio into segments of the overall food industry where it sees opportunities to "grow and diversify" its "strong cash flow".

The deal is the fourth for Post in the last 12 months as the third-largest breakfast cereals group in the US has looked to deal-making to boost growth. In May, CFO Rob Vitale told analysts M&A was "central" to the company's moves to "build long-term value".

Post, like its US cereal rivals, has found itself having to navigate a current environment of flat volumes. Breakfast cereal is still big business in the US and the recession bought a spike in sales in 2009 as value-seeking consumers turned back to the breakfast bowl. However, over the last five years, cereal sales have been flat at best and manufacturers have had to respond through NPD or turn to alternative, higher-growth categories.

In the last 12 months, Post has snapped up businesses in more attractive segments within the cereal category and stepped outside its breakfast heartland.

Last December, Post purchased Attune Foods, a branded breakfast cereal business but one operating in faster-growing segments like gluten free.

In May, Post made its first deal of the year with a $158m deal to buy cereal, granola and snacks assets owned by Hearthside Food Solutions. The deal included the Golden Temple, Peace Cereal, Sweet Home Farm and Willamette Valley Granola Co brands, as well as Hearthside's private-label granola business.

Earlier this month, the firm then snapped up the branded food and beverage business of Premier Nutrition Corp., a maker of products like vanilla shakes. Post said the deal will provide it with a springboard into the active nutrition and supplement market.

The acquisition of private-label firm Dakota Growers - which Post described as a "leader" in the $5bn North American pasta market - is another step well beyond its core breakfast cereals business.

"This is Post's fourth acquisition in the past year, continuing its aggressive push to increase its scale in the food industry, once again in a different category than its core US cereal business," Stifel Nicolaus analyst Chris Growe says.

In a note to clients, Growe suggested Post may not see as much of a sales boost than from its earlier deals. "Recent acquisitions added roughly a one percentage point benefit to its sales growth, by our estimate; we estimate a limited effect from the addition of Dakota," he wrote.

Industry watchers had praised Post's moves in the last 12 months that took it into segments of the breakfast cereals business that were in growth, like gluten free and granola. However, the response to Post's move into pasta has been less flattering. 

"Post does not have experience marketing pasta products and while the company is keeping it as an independent business, led by its current team, it may be difficult for Post to compete against existing pasta makers. For instance, Kraft Foods Group has a firm hold on the pasta market and it achieves increased sales largely due to brand recognition amongst consumers and innovation," IBISWorld analyst Jeffrey Cohen tells just-food. 

While the company is likely to face some challenges in the pasta category, private-label pasta does represent a growth spot in a stagnant US grocery market. 

According to Euromonitor International, pasta sales witnessed both value and volume growth last year, benefiting from its proposition as a convenient, cheap, eat-at-home meal during the economic downturn. And, Euronomitor's report - Pasta in the US - suggests, even as economic conditions improved, pasta's ease meant that it remained a favourite with US consumers. Volumes were up 1% in 2012 and value sales rose 2%, Euromonitor reveals. 

Significantly for Post, while the category does have some strong branded players, growth is being driven by private label, which accounts for 22% of sales. Private-label pasta sales reached about $751m in 2012, up 4% from 2011, Euromonitor reveals.

Private-label pasta is about more than a strong price position: product development is playing an integral part of the growth as retailer brands roll out better for you variants. That could bode well for Dakota Growers, suggesting there is the potential to develop private-label offerings that reach beyond the commoditised vision of everyday pasta. 

Post may, for the time being, have had its fill of acquisitions for the year as it looks to concentrate on integrating the companies it now has on board. Growe suggests Post could cool its buying spree for the time being after swallowing Dakota.

"We expect limited acquisition activity after this acquisition by the company - net debt/EBITDA stands at 4.6x, a level that we believe the company would like to work down before adding further to its debt load. In addition, the company needs to focus on integrating its various acquisitions, which we believe will increase the risk profile of Post in the short-run as it integrates the business."

However, he adds: "In the future, we expect more transactions from Post that continue to diversify its business away from cereal."