Fickle food fads and the $70 billion merger of Kraft Foods Group Inc KRFT with H.J. Heinz Co. could result in a new menu for Wall Street, an analyst said Monday.
"A new model is emerging" for the packaged food industry, according to Goldman Sach's Jason English.
The expected Kraft-Heinz merger may put cost-cutting pressure on competitors while acting as a spur to more mergers, English said.
Moreover, a shift in preferences by millennial consumers under the age of 35 will require packagers to pursue growth through lower-margin products in the natural and fresh categories, while jettisoning poorly performing brands.
Both trends imply a continued high level of buyouts, as companies seek to "rebalance their portfolios," English said.
Recent acquirers have paid relatively high premiums, and acquisitions have been proving costly to profit margins, according to English.
Recent, relatively high-priced deals on the foods sector English cited include General Mills Inc.'s GIS $820 million deal last year to buy Annies Inc. BNNY, Campbell Soup Co. CPB's $1.55 billion buyout of Bolthouse Farms in 2012 and Hershey Co HSY buy of beef jerky maker Krave earlier this year, for a reported $200 million to $300 million.
English maintains a Neutral view of the packaged food industry and on Monday raised his rating on General Mills to Neutral, citing its relatively favorable product portfolio and a "15 percent to 30 percent" chance of a merger.
In the separate, health and personal care category, English downgraded Church & Dwight Co. CHD to Neutral and Colgate-Palmolive Co. CL to Sell, citing their foreign exchange exposure and threats from European competitors.
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