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March 16, 2015

In the spotlight: Green Giant talk underlines pressure at General Mills

General Mills is reported to be considering putting its canned and frozen vegetable business Green Giant on the block. The US food group has refused to comment but, given its sales are under pressure and with US consumers turning away from more processed foods, it seems plausible the company would be weighing up a sale. Dean Best reports.

By Dean Best

Could the Jolly Green Giant become a victim of General Mills' domestic problems?

Last week, it was reported General Mills is looking to sell its frozen and canned vegetable business Green Giant, which sells products in North America and Europe, as well as further afield in markets like Australia and India.

Reuters claimed the US food group is working with Rothschild on a possible sale of the Green Giant business.

The US food group, unsurprisingly, says it did not comment on what it called "rumours or speculation". However, Reuters, citing sources, said a sale is expected this summer.

What is clearer is why General Mills would want to sell Green Giant. It does not disclose sales by brand but its 2014 annual report said vegetables accounted for only 5% of sales in fiscal 2013/14 and the category is a declining portion of the business.

Alexia Howard, an analyst covering General Mills for US investment bank Sanford Bernstein, says Green Giant's sales in the US – the brand's largest market – are under pressure. She says Green Giant's frozen vegetables in measured channels have been declining "at a low double-digit rate" over the past 18 months. According to Howard, sales of the brand's canned veg have been on the wane in recent months, falling in the mid-single digits.

It is unlikely an ailing Green Giant could attract a long queue of suitors. Howard posits a deal value of between eight and nine times EBITDA, based on the 8.7x US group Pinnacle Foods paid for the US Birds Eye frozen business in 2010. That would value a deal for Green Giant at $672-756m, Howard suggests, based on estimates of the General Mills' unit's EBITDA.

Pinnacle has been put forward as a potential buyer. Birds Eye is not present in the US canned vegetable category but there could be anti-trust concerns in the frozen segment. "In frozen vegetables, such a deal would increase market share from 26% to circa 44% according to Euromonitor," Howard says.

Could France-based Bonduelle, another supplier of canned and frozen veg, be a possible bidder? Bonduelle has a North American subsidiary based in Canada that sells canned and frozen veg across North America under its own brands and retail private-label, as well as to industrial and foodservice customers.

However, whether Bonduelle – a business that generated annual sales of EUR1.9bn (US$2.01bn) and net profit of just over EUR15m in 2013/14 – has the clout to buy Green Giant is debatable.

What is less debatable is that, unlike, say, cereal, yoghurt or snacks, canned and frozen veg no longer seems core to General Mills' business. And, with top-line proving hard to come by, General Mills may have decided to try to offload a declining business and focus resources elsewhere.

General Mills would not be alone among major packaged food companies looking to sell assets and focus on categories with better prospects. Look at the moves Unilever and Campbell Soup Co. have made in recent years.

A sale would be a further move by General Mills to reshape its domestic business, which still accounts for the bulk of the company's sales and earnings. In its last full financial year, General Mills' US retail business generated almost 60% of net sales and over three-quarters of its EBIT. The company has already tried to inject some growth into its US operations with the acquisition of natural and organic food maker Annie's last year. A sale of Green Giant would only intensify speculation General Mills could at some point make a move for Alpro owner WhiteWave Foods, a deal often mooted by analysts in the US.

"Judging from the Annie's acquisition, more of that kind of M&A would be a reasonable assumption, should these reports prove to be true," Athlos Research analyst Jonathan Feeney tells just-food. "WhiteWave would command a hefty price but [its] recent actions are likely driving its external appeal. Whatever its long-term plans and the other considerable strengths of WhiteWave’s portfolio, management's recent actions are likely driving its near-term appeal to hungry big packaged food companies, through expanding SKUs to drive the top line while expanding margins."

At the same, analysts estimated General Mills paid over 27x Annie's expected EBITDA. WhiteWave's recent growth – and bumper growth compared to swathes of the US packaged food sector – would likely command another hefty multiple. However, industry watchers pondering the possible sale of Green Giant and General Mills' possible subsequent strategic moves suggest a bid for WhiteWave would be positive for the Cheerios and Yoplait maker.

"We wouldn't be surprised to see firms that are already exposed to the dairy category – like Danone, Nestle, and even General Mills – look to add WhiteWave's organic product set to the mix, in light of the attractive growth characteristics the category displays. Even the fact that such an addition would prove margin-dilutive for these leading packaged food firms would be unlikely to forestall a deal, from our vantage point, as increased leverage and scale could prop up WhiteWave's profitability over time, although not likely to the midteens margins leading firms enjoy," Morningstar analyst Erin Lash says.

"WhiteWave would add circa 16% to General Mills' sales and strengthen its dairy business by combining Yoplait yogurts with Horizon Organic milk," Howard says. "And General Mills has also had some experience with the strength of [WhiteWave's] Silk plant-based beverage brand since it used to participate in a venture with the 8th Continent brand. At a 30% control premium to its current price, a purchase of WhiteWave would dilute EPS by almost circa 10% for General Mills before cost synergies. However, if we factor in approximately 8.5% of White Wave sales (circa $292m) as cost synergies achieved over a 2-3 year period, the deal becomes slightly accretive (approximately 1%)."

What the speculation around Green Giant has done is underline the challenges within the General Mills portfolio. The company has refused to comment but, given its recent domestic performance and the weak sales trends in parts of its portfolio, it seems perfectly possible General Mills is considering the future of brands like Green Giant as part of attempts to refashion its portfolio to focus on growing parts of the industry.

General Mills has made a series of announcements on its cost base, cutting jobs and closing plants. However, to get the top line growing, it may have to do some work on its portfolio.

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