3G Effect Makes Mondelez a Target as Activists Circle: Real M&A
2015-08-06 18:20:22.539 GMT
(For a Real M&A column news alert: {SALT REALMNA <GO>}.)
By Brooke Sutherland
(Bloomberg) -- Aggressive cost cuts aren’t enough to
save food companies from scrutiny after 3G Capital set the
industry bar for just how deep they can go.
Activist investor Bill Ackman revealed late Wednesday that
he has built a 7.5 percent stake in Mondelez International Inc.
That holding could be used to push the maker of Oreo cookies and
Ritz crackers to go beyond the $3 billion in cost cuts that
Chief Executive Officer Irene Rosenfeld has already pledged amid
pressure from Nelson Peltz’s Trian Fund Management.
That plan was impressive when Rosenfeld first announced
cuts in 2013. But compared to what 3G Capital has been able to
achieve with a more-efficient H.J. Heinz Co., Mondelez’s
reductions now seem paltry, said Alexia Howard of Sanford C.
Bernstein & Co. 3G also will trim expenses through Heinz’s
purchase of Kraft Foods Group Inc., which was backed by Warren
Buffett and closed in July.
“3G is turning the food industry upside-down,” Brian
Yarbrough, an analyst at Edward Jones & Co., said by phone.
“Activists are seeing the opportunity that, ‘Wow, if 3G can do
this, why don’t we go in and put pressure on management?’”
Ackman’s $5.6 billion stake in Mondelez is a bet that the
company can get its margins more in line with those of 3G’s
targets -- one way or another. If Mondelez can’t make sufficient
cuts on its own, then maybe 3G could, through a takeover of the
company. Mondelez has long ranked at the top of the list of
speculated targets for the investment firm co-founded by
Brazilian billionaire Jorge Paulo Lemann.
Not Obvious
Mondelez wasn’t the most obvious candidate for more
activism. The shares had climbed 27 percent so far this year
before Ackman disclosed his stake, for the third-best
performance on the Standard & Poor’s 500 Consumer Staples Index.
Peltz has been involved with Mondelez since at least 2013,
at one point pushing for a deal with PepsiCo Inc. before
settling for a seat on the board and cost cuts. As part of
Rosenfeld’s cost-cutting plan, she is implementing zero-based
budgeting, an accounting approach favored by Peltz’s Trian and
made famous by 3G in which companies start with a budget of zero
and have to justify each expense.
In a post-3G world, that may not be enough.
Mondelez had a margin of about 12.5 percent on earnings
before interest, taxes, depreciation and amortization at the end
of June. It mainly operates in snack categories that should have
higher margins than ketchup. Yet 3G set a goal of boosting
Ebitda margins at Heinz to about 30 percent and has essentially
already achieved that in just two years. That’s not far off from
profitability at Google Inc. and Apple Inc., technology
companies with much lower operating expenses.
Margin Laggard
Comparing Mondelez to the newly formed Kraft Heinz Co. is
not exactly apples-to-apples, said Ken Shea, an analyst at
Bloomberg Intelligence. Mondelez gets almost 80 percent of its
revenue from overseas and as such, is more subject to currency
pressures from the strong U.S. dollar. Still, that doesn t
change the fact that its margins lag behind most large global
packaged-food peers, according to data compiled by Bloomberg.
“There’s not a lot to complain about,” Shea said. But
“for a company with such strong brands, why isn’t it performing
the best? Is it good enough for the Yankees to come in third?”
In-House
Mondelez’s best bet for boosting margins substantially in a
hurry is to make the changes on its own.
While 3G will continue to roll up the food industry with
more deals, the Kraft takeover was massive at about $46 billion
before net debt. It’s going to take time to integrate the
acquisition with Heinz and to pay down borrowings. And Mondelez
is no small undertaking with a market value of $75 billion.
“It’s later rather than sooner,” Yarbrough of Edward
Jones said. “It’s too early for 3G or Buffett to do anything
and there’s no one else really big enough to buy these guys.”
The only alternative may be PepsiCo, and Chief Executive
Officer Indra Nooyi has shown no interest in Mondelez after
multiple calls for a deal from Peltz.
The more cost cuts that Mondelez makes though, the less
appealing it is for 3G because there’s less to do.
There are other packaged-food targets that could be easier
to digest with more room for improvement, such as Kellogg Co.,
General Mills Inc. or salt-and-pepper maker McCormick & Co. All
have market values under $40 billion. Or 3G could return to the
beverage industry: The investors helped orchestrate InBev NV’s
takeover of Anheuser-Busch in 2008. Diageo Plc is one that could
hold appeal.
That’s not to say 3G couldn’t still pounce on Mondelez in a
few years. That could be Ackman’s plan: try to be 3G on his own
and if that doesn’t work, hand the reins over to the masters.
For Related News and Information:
Kraft Deal Puts More Pressure on Low-Growth Foodmakers: Real M&A
Buffett, 3G Transform Kraft From Laggard to Best Stock: Real M&A
Buffett Plan for More 3G Deals Sparks Kellogg Talk: Real M&A
MegaBrew Is Left to Ferment After 3G Focuses on Food: Real M&A
Deal top: DTOP <GO>
Real M&A columns: NI REALMNA <GO>
--With assistance from Craig Giammona in New York.
To contact the reporter on this story:
Brooke Sutherland in New York at +1-212-617-0448 or
bsutherland7@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Elizabeth Wollman
2015-08-06 18:20:22.539 GMT
(For a Real M&A column news alert: {SALT REALMNA <GO>}.)
By Brooke Sutherland
(Bloomberg) -- Aggressive cost cuts aren’t enough to
save food companies from scrutiny after 3G Capital set the
industry bar for just how deep they can go.
Activist investor Bill Ackman revealed late Wednesday that
he has built a 7.5 percent stake in Mondelez International Inc.
That holding could be used to push the maker of Oreo cookies and
Ritz crackers to go beyond the $3 billion in cost cuts that
Chief Executive Officer Irene Rosenfeld has already pledged amid
pressure from Nelson Peltz’s Trian Fund Management.
That plan was impressive when Rosenfeld first announced
cuts in 2013. But compared to what 3G Capital has been able to
achieve with a more-efficient H.J. Heinz Co., Mondelez’s
reductions now seem paltry, said Alexia Howard of Sanford C.
Bernstein & Co. 3G also will trim expenses through Heinz’s
purchase of Kraft Foods Group Inc., which was backed by Warren
Buffett and closed in July.
“3G is turning the food industry upside-down,” Brian
Yarbrough, an analyst at Edward Jones & Co., said by phone.
“Activists are seeing the opportunity that, ‘Wow, if 3G can do
this, why don’t we go in and put pressure on management?’”
Ackman’s $5.6 billion stake in Mondelez is a bet that the
company can get its margins more in line with those of 3G’s
targets -- one way or another. If Mondelez can’t make sufficient
cuts on its own, then maybe 3G could, through a takeover of the
company. Mondelez has long ranked at the top of the list of
speculated targets for the investment firm co-founded by
Brazilian billionaire Jorge Paulo Lemann.
Not Obvious
Mondelez wasn’t the most obvious candidate for more
activism. The shares had climbed 27 percent so far this year
before Ackman disclosed his stake, for the third-best
performance on the Standard & Poor’s 500 Consumer Staples Index.
Peltz has been involved with Mondelez since at least 2013,
at one point pushing for a deal with PepsiCo Inc. before
settling for a seat on the board and cost cuts. As part of
Rosenfeld’s cost-cutting plan, she is implementing zero-based
budgeting, an accounting approach favored by Peltz’s Trian and
made famous by 3G in which companies start with a budget of zero
and have to justify each expense.
In a post-3G world, that may not be enough.
Mondelez had a margin of about 12.5 percent on earnings
before interest, taxes, depreciation and amortization at the end
of June. It mainly operates in snack categories that should have
higher margins than ketchup. Yet 3G set a goal of boosting
Ebitda margins at Heinz to about 30 percent and has essentially
already achieved that in just two years. That’s not far off from
profitability at Google Inc. and Apple Inc., technology
companies with much lower operating expenses.
Margin Laggard
Comparing Mondelez to the newly formed Kraft Heinz Co. is
not exactly apples-to-apples, said Ken Shea, an analyst at
Bloomberg Intelligence. Mondelez gets almost 80 percent of its
revenue from overseas and as such, is more subject to currency
pressures from the strong U.S. dollar. Still, that doesn t
change the fact that its margins lag behind most large global
packaged-food peers, according to data compiled by Bloomberg.
“There’s not a lot to complain about,” Shea said. But
“for a company with such strong brands, why isn’t it performing
the best? Is it good enough for the Yankees to come in third?”
In-House
Mondelez’s best bet for boosting margins substantially in a
hurry is to make the changes on its own.
While 3G will continue to roll up the food industry with
more deals, the Kraft takeover was massive at about $46 billion
before net debt. It’s going to take time to integrate the
acquisition with Heinz and to pay down borrowings. And Mondelez
is no small undertaking with a market value of $75 billion.
“It’s later rather than sooner,” Yarbrough of Edward
Jones said. “It’s too early for 3G or Buffett to do anything
and there’s no one else really big enough to buy these guys.”
The only alternative may be PepsiCo, and Chief Executive
Officer Indra Nooyi has shown no interest in Mondelez after
multiple calls for a deal from Peltz.
The more cost cuts that Mondelez makes though, the less
appealing it is for 3G because there’s less to do.
There are other packaged-food targets that could be easier
to digest with more room for improvement, such as Kellogg Co.,
General Mills Inc. or salt-and-pepper maker McCormick & Co. All
have market values under $40 billion. Or 3G could return to the
beverage industry: The investors helped orchestrate InBev NV’s
takeover of Anheuser-Busch in 2008. Diageo Plc is one that could
hold appeal.
That’s not to say 3G couldn’t still pounce on Mondelez in a
few years. That could be Ackman’s plan: try to be 3G on his own
and if that doesn’t work, hand the reins over to the masters.
For Related News and Information:
Kraft Deal Puts More Pressure on Low-Growth Foodmakers: Real M&A
Buffett, 3G Transform Kraft From Laggard to Best Stock: Real M&A
Buffett Plan for More 3G Deals Sparks Kellogg Talk: Real M&A
MegaBrew Is Left to Ferment After 3G Focuses on Food: Real M&A
Deal top: DTOP <GO>
Real M&A columns: NI REALMNA <GO>
--With assistance from Craig Giammona in New York.
To contact the reporter on this story:
Brooke Sutherland in New York at +1-212-617-0448 or
bsutherland7@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Elizabeth Wollman