Blog: If Kraft Heinz passed on Pinnacle, it should do so with Campbell

Dean Best | 2 August 2018

It's almost 18 months since Unilever rebuffed Kraft Heinz and, ever since, the rumour mill has spun over where the US manufacturer could look next. And it's been reported today (2 August) the ketchup maker decided against moving for US peer Pinnacle Foods.

Citing an unnamed source, business broadcaster CNBC said Kraft Heinz passed up the chance to acquire Pinnacle before the Birds Eye and Duncan Hines owner went through with a sale to a third US food major, Conagra Brands.

Documents recently filed with the US Securities and Exchange Commission show before its deal with Conagra, Pinnacle's management had itself been looking at various acquisitions, none of which came off.

The documents also show Pinnacle's management had, between January 2017 and May 2018, been in contact with an unnamed business - Company A - over a number of possible transactions. CNBC's source said today Company A was Kraft Heinz.

Those discussions were held while Pinnacle and Conagra were in talks about a possible transaction between their companies, the documents show.

On 10 May, Pinnacle's senior vice president of corporate development, Michael Leavitt, inquired whether Company A wanted to buy the company.

Company A, the documents state, "was likely not interested in acquiring Pinnacle because such an acquisition would not be a good strategic fit".

The two companies stayed in contact throughout May and into June. Come 19 June, Pinnacle's advisers again put the suggestion to Company A's reps, who said Company A "was not interested in acquiring Pinnacle because such an acquisition would not be a good strategic fit for Company A at the current valuation levels".

Pinnacle moved forward with its discussions with Conagra and, on 27 June, the two sides announced a deal worth US$10.9bn.

CNBC said today Company A's (or, as the broadcaster put it, based on its source) Kraft Heinz's lack of interest in Pinnacle could have implications for its rumoured eyeing up of Campbell Soup Co.

In late June, The New York Post , quoting "a source close to the situation" - reported Kraft Heinz as interested in buying Campbell, which is without a permanent CEO and going through a review of its portfolio.

CNBC said today Kraft Heinz's rejection of Pinnacle's suggestion of a sale implies the Jell-o and Heinz baked beans maker is looking beyond the centre of the store, where growth has been hard to come by and where, of course, Campbell has a significant presence with its soups and sauces.

Kraft Heinz is set to report its second-quarter numbers tomorrow (3 August). Kraft Heinz has been built through M&A. 3G Capital, the Brazil-based private-equity firm and the more operational of Kraft Heinz's two largest shareholders (the other being Warren Buffett's Berkshire Hathaway) made its name leading the consolidation of the beer industry.

And it is three years since 3G and Buffett combined Kraft Food Group and HJ Heinz. All that means M&A is never far from the agenda when analysts sit down with Kraft Heinz's management to discuss the latest set of figures.

Kraft Heinz's management was asked about its M&A strategy when the company announced its first-quarter results in May. CEO Bernardo Hees said: "Our framework for capital allocation, organic and inorganic, has not changed. We continue to like big brands. We continue to like businesses that can travel and continue to like businesses that we can generate efficiency that can be invested behind growth, brands, products and people."

There are very likely to be more questions tomorrow.

Meanwhile, Campbell plans to announce the results of its strategic review later this month. Interim CEO Keith McLoughlin told investors in May "everything is on the table" and "there are no sacred cows".

Of course, a business reviewing its options could be said to be more open to a possible sale. But would - and should - Kraft Heinz move in?

On our opinion pages in June, your correspondent sought to set out why Kraft Heinz might be best served steering clear of Campbell.