This pitch book delivers several solid justification for Heinz’s move to acquire General Mills in exchange for cost and revenue synergies. Heinz’s heavy reliance on sauce-based products, whose already mature market implies slow growth trend, can be tackled by the addition of General Mills’ 9+ unmatched product categories. This allows reshaping its portfolio, which in return, create healthy top line growth for Heinz. Moreover, General Mills’ efforts to reduce high COGS and SG&A, as it should be an overall food industry challenge, through Holistic Margin Management allow Heinz to achieve significant cost synergies. Lastly, General Mills’ response to declining organic growth and R&D trend by acquiring Blue Buffalo, a pet food manufacturer, and establishing its venture capital introduce a growth-sustaining strategy to become an international powerhouse for Heinz.
- Part 1. Target Industry Overview – Global F&B and Packaged Food Industry
- Part 2. Investment Highlights
- Part 3. Target Business Overview – General Mills, Inc.
- Part 4. Target Financial Overview – General Mills, Inc.
- Part 5. Valuation Overview – Football Field Chart
Shin, Jae won
Finance Project Member
FCB Finance Institute
Concentration Area: M&A Advisory
Finance Project Portfolio
Part1. Target Industry Overview – Global F&B and Packaged Food Industry
The global food industry’s slow and stable growth rate and huge market size confirm it as a mature industry with defensive nature in stock market. It and its sub-category, packaged food industry, are expected to attain $7.38 trillion with CAGR 3.5% and $3.03 trillion with GAGR 4.5%, respectively by 2021. The trend in healthy food, new products and more people eating at home, have pushed the industry to meet customers’ taste and needs and introduce new food category. The challenges it faces are the followings; it has high COGS and SG&A proportion relative to revenues and it has low CAPEX and R&D cost, which hamper organic growth. One of the breakthroughs is to participate in M&A activities to increase market share and pioneer into new market.
Part2. Investment Highlights
This M&A deal involves two investment highlights. First, the combined entity will reshape its product portfolio. The transaction will introduce GIS’s unmatched iconic brand portfolio across +9 diverse categories to Heinz’s traditional sauce-based portfolio. As a result, it is expected to become 1st or 2nd in each of their product category markets. Second, with low CAPEX and R&D costs, General Mills rather focuses on its innovation through acquisition. Its venture capital fund, called 301 Inc, offers unique perspectives and innovative approaches to new products, testing a range of innovative products with established operations, marketing, and customer bases. Additionally, GIS acquired a pet food manufacturer, called Blue Buffalo for new growth engine.
Part3. Target Business Overview – General Mills, Inc.
As a leading global manufacturer and marketer of branded consumer goods, General Mills sells its diversified products to more than 130 countries worldwide. The ownership structure implies that it is nearly impossible to acquire 100% shares due to dilution and cost issues. Therefore, we recommend to acquire 25% of total shares with 25% premium to the current market price for the purpose of management control. This transaction requires total $8.1 billion, of which $6.2 billion will be financed through equity and the remaining $2.0 billion will be financed through debt. The combined entity will achieve over $20 billion sales, becoming the third largest player in the US food and beverage industry. Integrating two separately established global footprints can create revenue synergies.
Part4. Target Financial Overview – General Mills, Inc.
The graph on the bottom right displays net sales declining especially from 2014 to 2017. This is mainly due to fierce competition in yogurt market and several product recalls. However, we can see that the company recovered its top-line again in 2018 due to continuous efforts to restore trust and new business initiatives. One of the highlights General Mills possesses is its industry leading operating margin, approximately 16% as opposed to 6% operating margin on average in food industry. As a result, this leads to strong operating cash flow, which is returned to shareholders as a form of dividends and share repurchase.
Part5. Valuation Overview – Football Field Chart
Total four valuation methods are employed to display reasonable price band for General Mills’s enterprise value. For Trading comps, four comparable companies in the US food industry are selected. For Transaction Comps, two recent transaction in the US food industry are selected; Synder’s – Lance & Campbell Soup and Pinnacle Foods & Conagra Brand. For DCF, WACC of 6.11% – 7.11% as well as TGR of 0.75% – 1.25% are used. As a result of the four valuations, the implied takeout price turns out to be $54.94 per share based on 25% premium to the current market price. We believe that such price is affordable since it falls within the Transaction Comps’s range with its enterprise values being reflected in reality, and stakeholders, who think GIS’s share overvalued, are willing to sell their shares and take capital appreciation.
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