Del Monte Foods is said to be looking to offload its canned food business. Such a deal may not come as a surprise to industry observers given the increasing competition it faces in North America and its focus on pet food but Michelle Russell takes a look at why it might look to divest the unit and who might buy.
Reports emerged this week that Del Monte is mulling the sale of its ubiquitous but slow-growing canned-food business. It is understood the US food firm is gauging interest from potential acquirers, people familiar with the matter told The Wall Street Journal.
Centerview Partners and Morgan Stanley are understood to have been hired to assist in the sale of the business by Del Monte’s owners, a consortium of private equity firms led by KKR. The PE coalition purchased Del Monte for $4bn in 2011. The process remains in the “early stages”, the publication noted.
San Francisco-based Del Monte’s canned business pulls in around US$1.8bn in sales annually, representing about half of the company’s revenue. The division includes items such as fruit cups, canned vegetables and brands such as Contadina and College Inn broths.
While Del-Monte’s canned business is in growth, its revenue gains can hardly be classed as dynamic. In its full-year results today (21 June), the unit recorded 1.1% sales growth. This compares to 7% growth from Del Monte’s higher-growth pet product division, a business CEO Dave West has been slowly increasing his focus on.
Euromonitor senior food analyst Ildiko Szalai believes the canned foods unit might not be generating enough growth for a private equity firm to want to hold on to it.
“It is owned by a private equity firm and as soon as something is not growing profitably under private equity they sell. They don’t muddle through and keep trying, they only keep a business when it is fast growing and profitable. KKR probably don’t see that they can turn it around and turn it into a faster growing business,” she suggests.
Growth at Del Monte’s canned business is being constrained by a number of factors. Significantly, the group is facing increased competition – resulting in downward pressure on pricing – as it fends off the challenge from private label products. In the US’s low growth and highly price-conscious environment, this trend inhibits the company’s ability to add value to the sector through innovation or brand building initiatives and suggests that such attempts could generate a weak return on investment.
Indeed, Szalai points to this category weakness as another reason why Del Monte’s private equity owners could look to offload the business.
“The consumer products business is very strongly focused on North America where there is very strong private label competition in these canned food categories, so there is not really much opportunity to add that much value and to increase profitability. The market is very mature.”
She adds: “I suppose at the time when this consortium bought it they thought maybe they could do a big global launch and take it to some markets that have faster growth but they haven’t done that. The sector is very low growing for private equity standards so I’m not surprised they are thinking about not carrying on.”
While the category’s low growth prospects may have deturred Del Monte’s current PE owners, Glenboden analyst Stefan Kirk maintains that the business could still pique the interest a private equity.
“Canned foods seems more a category for private equity than strategic buyers. Active food and beverage-oriented private equity firms include Lion Capital, who invest in Europe and North America,” Kirk suggests.
If it were to fall into the hands of a strategic buyer, however, Kirk has his money on ConAgra.
“In terms of strategics it could be something for ConAgra who are keen on hoovering up grocery products brands and businesses in the US. However, they may need time to digest Ralcorp, acquired earlier this year.”
Certainly, ConAgra has been on somewhat of a spending spree in the last few years. Aside from last year’s sizeable deal to buy long-time target and US own-label group Ralcorp Holdings, the company also bought the US private label pita chips business from Kangaroo Brands, Odom’s Tennesse Pride and Unilever’s frozen meals business last year.
Another factor that could well mean many in the industry view ConAgra as a front-runner for the business is its ownership of Del Monte Canada, which it bought from private-equity firm Sun Capital Partners in January 2012.
Szalai concurs that ConAgra is her “best guess” as frontrunner.
“Unless another private equity company comes along that can come up with an idea on how to make the business grow, an opportunity the current owner has missed, then I think ConAgra is quite a good bet. They need to build scale and they want to grow. They will need the scale if they are to compete on a more global scale than they are at the moment,” she suggests.
From the trade side, who else could throw their name in the hat? Industry watchers suggest that some of the most obvious candidates are Campbell Soup Co and Heinz.
However, Szalai argues, given their positioning in the canned foods category, these firms are unlikely candidates to take on Del Monte.
“I don’t think Campbell would want any more canned food than they already have. Campbell is going into snacking and now they’re in baby food. They are actually in the same boat as Del Monte – exposed to the slow growing North American market. I don’t think they’ll enhance their scale in this area so I think Campbell is out.”
Indeed, Campbell has focused its recent M&A efforts on driving growth in more buoyant categories and markets: Del Monte does not currently fit this profile.
Szalai offers a similar view for Heinz. “I don’t think they would go into such a slow growing, mature category. They are also checking out baby food and some other faster growing assets.”
If reports are to be believed, Del Monte could net in the region of $2bn for a division that has made it a household name. This would allow the canned fruit manufacturer an opportunity to plough further investment into its pet food business, which includes brands such as Milk-Bone and Kibbles ‘n Bits.
The company has been steadily increasing its focus on products for dogs and cats. Last month, the firm signed a merger agreement with Natural Balance Pet Foods, a maker of super-premium pet food for dogs and cats sold throughout North America, Europe and Asia. The deal, Del Monte said, was consistent with its long-term strategy of further strengthening its pet food and snacks brand portfolio.
Del Monte is one of the largest players in pet food in the US; alongside Mars and Nestle. Pet food is also among the fastest-growing sectors in the FMCG space, so to turn its attentions elsewhere could be business suicide.
A disposal of its canned foods business while it is still generating growth, albeit low, appears to be the most viable solution if it wants to remain competitive. However, it seems possible that such a break-up could also mean that – with a smaller base – the more focused Del Monte pet food business could potentially become a takeover target itself.