Heinz has signalled that it is on the acquisition hunt, having built up a sizeable war chest to fuel growth. At yesterday’s (13 August) AGM, the Pittsburgh-based ketchup maker hinted that US soup giant Campbell Soup Co could be one of the targets in its sights. Katy Humphries reports.
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Heinz is a company on the up: it is on a roll in terms of both results and acquisitions. So it should hardly come as a surprise that president and CEO William Johnson’s suggestion that the group is eyeing the Campbell Soup Co is creating quite a stir.
Describing Campbell as a “great company”, Johnson tells investors gathered at Heinz’ AGM that the group would fit well with Heinz’s current direction and product portfolio.
Responding to a question from a shareholder during a Q&A session, Johnson comments: “Campbell would represent a nice fit with the company. We are always looking for opportunities to expand and grow.”
In his prepared remarks, laying out the group’s expansion strategy for the next two year’s, Johnson emphasises Heinz’ aim to make strategic acquisitions in both developed and emerging markets.
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By GlobalData“With a healthy balance sheet and abundant opportunities to explore in both the developed and developing world, we are confident in our ability to execute value-added acquisitions,” Johnson says.
However, Heinz is coy in revealing anything further about the ambitions it may have towards Campbell, simply telling just-food that it has “no further comment”.
So, is Johnson’s statement an off-the-cuff answer to a direct question or are his words indicative of real interest in Campbell and possibly even the beginning of a courtship?
It is no secret that costs are soaring in the food industry. Poor weather and increased demand have driven up the price of many key ingredients – tomatoes included – and high energy prices have pushed up transportation and production costs.
In this climate, both Heinz and Campbell are facing narrowing profit margins.
A merger would benefit the groups, as they would be able to leverage economies of scale to cut costs.
According to an investor note from Citigroup, Campbell is an attractive acquisition target because it offers a number of synergies.
Both Heinz and Campbell rely heavily on thermal processing technologies, a fact that leads Citigroup analysts David Driscoll, Michael Lavery and Cornell Burnette to estimate that a merger of the two groups would create annual synergies of US$650-700m, which could be realised within two years of the merger.
“We believe that a Campbell-Heinz combination could generate between $650m and $700m in gross synergies based on the relative size of the two companies’ US thermal processing business,” the analysts write.
A combined Heinz-Campbell entity would also have significantly more buying power and, as a result, more muscle in negotiations with suppliers. Likewise, the enlarged group would have a greater ability to push through price increases when negotiating with retailers.
With sales in the US relatively flat, both Heinz and Campbell are increasingly turning to international markets to fuel growth.
Heinz’ sales in emerging markets grew by 25% during fiscal 2008 to account for 13% of total group sales. Much of this growth has been fuelled by acquisitions.
The company said it anticipates emerging markets to contribute about one-third of total sales growth over the next two years. And sales in emerging markets are expected to account for as much as 20% of sales growth by 2013, Johnson says. That’s an increase in sales from $1.29bn now to $3bn in five years time.
In contrast, Campbell is in the process of narrowing its international focus by selling off non-core businesses such as its recent divesture of its French mayonnaise and sauce subsidiary, Generale Condimentaire, and its Australian salty snack food business.
Although Campbell is intensifying its focus on soup, the group’s remaining brands would fit neatly within Heinz’ portfolio – which is increasingly centred on the health and wellness and convenience categories.
Renowned for its ketchup, Heinz also has – among other things – a number of soup brands including Classics, Weight Watchers from Heinz, Taste of Home, Big Soup, Farmers’ Market and Soups of The World. The company achieved record share gains in the UK soup category last year and recently announced plans to expand its product line-up.
Within developed markets Heinz is driving growth through innovation and the company said that it currently has around 400 product innovations in the pipeline.
“Not since the days Henry Heinz was introducing his first 57 varieties have we been driving such a strong innovation agenda for the Heinz brand globally. We had a busy year of product launches for the brand in fiscal 2008, with another on tap for fiscal 2009,” Johnson tells his audience at the AGM.
This strategy would presumably be equally effective for the iconic Campbell’s brand of soups as it has proven across Heinz’ existing product portfolio.
The strategic justification for Heinz making an approach to Campbell seems clear, but whether one will come is far from a foregone conclusion, Citigroup analyst BG Dickey tells just-food.
“It is interesting that Johnson would say they are a good fit. …And it is something that they [Heinz] have thought about previously,” Dickey says.
However, he continues: “We haven’t really heard anything substantial that would lead us to think it is going to happen anytime soon.”
Indeed, the market seems to concur: it is an interesting proposition but at the moment it is little more than hot air. While Campbell’s shares have traded at higher volumes than usual since Johnson’s remarks their value has remained relatively flat, trading at $37.57 at time of press.
Whether or not this particular deal materialises, it seems that there are many possibilities on the horizon for Heinz. With a bullish outlook and a sizeable acquisition fund we can certainly expect to see considerable acquisitive activity coming out of Pittsburgh in the months to come.
