Macaroni merger: The $62bn takeover of Kraft by Heinz in 2015 was the biggest food deal to date © Getty
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For those who like putting ketchup on their macaroni and cheese, the $62.6bn takeover last year by Heinz of Kraft — purveyors of the American pasta staple that comes in a blue box — will have been a winning combination.

But for the growing number of consumers who are turning away from packaged food, the merger was a defensive one, aimed at addressing low sales growth by cutting costs in order to make two of America’s best-known, but ultimately tired, brands more profitable.

Saving $1.5bn a year, the merger will shed 5,000 jobs, or 10 per cent of the combined workforce, and close seven manufacturing plants.

Kraft Heinz, as the combined company is known, has already made financial sense for some of its investors, notably Warren Buffett. In November, the head of Berkshire Hathaway investment group, reported a $4.4bn windfall from the deal.

He worked with 3G Capital, the private equity group co-founded by Brazil’s Jorge Paulo Lemann, the driving force behind the growth of brewer Anheuser-Busch InBev, on a buyout of Heinz in 2013. The two then moved on to consolidate Kraft in March 2015.

The merger was one of the largest M&A deals last year and the biggest in food, signalling a trend towards greater consolidation among large, legacy food brands, especially among companies in the US such as General Mills or the Campbell Soup Company.

“For the US, M&A activity will continue to be robust as companies continue to look for sales growth and margin improvement,” says Diane Shand, senior director at Standard & Poor’s, the credit rating agency. “Moreover, the Kraft and Heinz merger sets a precedent for larger cost-cutting programmes and further consolidation in the industry.”

Within developed economies, food M&A is being driven primarily by the changing tastes of younger consumers, who are shunning processed food in favour of natural, healthier and more local products. The growth of this segment of the market has been fast, in contrast to that of most large packaged food companies.

According to OC & C, a consultancy, revenue growth of the world’s 50 biggest food companies slowed to 1.7 per cent in 2014, from 2.9 per cent in 2013 and from 5.6 per cent in 2012.

As FX (François-Xavier) de Mallmann, global co-head of consumer retail and healthcare at Goldman Sachs, says: “We expect consolidation to accelerate, especially in the US, where a number of legacy brands and categories are growing less fast. Capital markets and, in selected cases, activists, are putting pressure on these companies to manage their cost base more efficiently and increase cash flow generation, which many believe can be better achieved through greater scale.”

A second driver of M&A activity is larger food companies’ appetites for innovative start-ups, as the former forage for faster-growing revenue streams in the grocery aisles. The demand has made younger companies highly sought after and pushed up their valuations sharply.

General Mills, best-known for Cheerios breakfast cereal and Pillsbury dough, bought Annie’s, a packaged food group that uses organic and natural ingredients, in 2014; Coca-Cola last year took a minority stake in Suja Juice, an organic juice-maker, and Hormel, the producer of Spam, paid $775m last year to acquire Applegate Farms, an organic processed meats producer.

In Europe, Unilever, which makes Lipton tea and Flora margarine, has developed a taste for premium ice cream to add to its Magnum and Ben & Jerry’s brands. It made two recent purchases: Talenti, a Minneapolis-based upmarket sorbet maker, and Grom, the Italian ice-cream maker that says it does not use flavouring, colouring, preservatives or emulsifiers.

Akeel Sachak, global head of consumer at Rothschild, says that the changing preferences of the millennial consumer explain this new-found enthusiasm on the part of multinationals to enter the natural and organic food market. “This has hitherto been mainly the preserve of hippy-type entrepreneurs from California and a select band of visionary larger consolidators such as Hain Celestial and WhiteWave,” he says.

Companies such as Hain, which owns the Linda McCartney vegetarian brand, and WhiteWave have been growing partly through acquisition of organic and natural food companies. Hain, a New York-based group with a market value of $4.1bn, last year acquired Mona Group, a European company that makes soy and nut-based drinks. This followed its acquisition of Rudi’s Organic Bakery, a Colorado-based producer of gluten-free products.

WhiteWave Foods, based in Denver, has followed a similar strategy. The owner of the Silk and Alpro plant-based milks, paid $550m last year to buy Vega, which produces plant-based snack bars and powdered shakes.

A third M&A driver is specialisation — becoming bigger in one category — a strategy being pursued in coffee by JAB Holding, the billionaire Reimann family’s investment group. JAB, which also owns the Coty cosmetics business, offered $13.9bn in December 2015 to acquire Keurig Green Mountain, maker of coffee systems, in the US. The deal will make it the main challenger in the coffee capsule market to Switzerland’s Nestlé, which owns Nespresso.

Low interest rates, economic recovery and still buoyant stock markets suggest that 2016 will be another strong year for food deals. These factors made 2015 a record year for global dealmaking, with $4.6tn of activity across all industries.

Michael Collinson, managing-director of European consumer and retail at William Blair investment bank, sees no reason for M&A activity to taper off, especially given the appetite among private equity groups for food assets.

“Food is still relatively fragmented compared to beverages or homecare,” he says. “It’s a much more accessible market to private equity, partly because of the size of the companies and the valuations paid.”

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