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Snack Attack: Consumer food giants get the munchies

Packaged food giants are feeling peckish again.

JM Smucker’s [NYSE:SJM] USD 5.5bn acquisition earlier this month of Hostess Brands [NASDAQ:TWNK], maker of Twinkies and other sweet baked treats, is the biggest snack deal in five years.

Mergers and acquisitions targeting North America-based snack food companies are now at their highest dollar volume since 2018, according to Mergermarket data. In the year to date (27 September), 16 transactions worth USD 5.6bn have been announced, although valuations in two-thirds of those deals were not disclosed.

To be sure, snack food M&A is still far off historical highs. The number of transactions has declined ever since peaking at 36 deals in 2017. Today’s deal volume pales in comparison with 2015’s record USD 77.5bn, although Kraft Foods’ sale to HJ Heinz accounted for USD 62.6bn of that.

Hungry for convenience 

JM Smucker, whose Jif peanut butter and fruit spread brands are a mainstay of the grocery store’s central aisles, had been struggling with growth before the COVID-19 pandemic. The addition of Hostess provides a new sales channel – the convenience store, said Keith Daniels, a managing partner at Carl Marks Advisors. JM Smucker also becomes a larger player in the grocery store, giving it greater pricing and negotiating power with supermarkets—which is an important consideration after the industry resumed its round of consolidation with the merger of Albertsons and Kroger last year, he noted.

“I can see more deals getting done in a ‘me-too’ environment,” Daniels said.

Other Hostess suitors, which included General Mills [NYSE: GIS], Mondelez [NASDAQ: MDLZ], Pepsi [NASDAQ: PEP] and Hershey [NYSE: HSY], could feature among buyers of snack food brands, he said. Other major snack food companies could also feature as buyers, he said, such as Mars (which acquired Kevin’s Natural Foods in July), Unilever [NYSE: UL] (which bought yoghurt-bar brand Yasso) and Campbell Soup [NYSE: CPB] (buyer of Rao’s tomato sauces in August).

One company in the market is Shearer’s Foods, a kettle chip maker. The company was expected to conduct a sale process after Labor Day and could fetch USD 3bn.

Private label threat 

Grocery store chains are gravitating toward selling their own proprietary snacks (outsourced to private label manufacturers) as a way to bolster their bottom lines—and legacy food companies are wary of this threat to sales, said Daniels. “A branded food company like Smucker is looking to fend itself from private labels. [Buying Hostess] gives them an opportunity to be more defensive.”

Outstanding Foods, a maker of high-protein, plant-based cheese puffs under its own label, sees growth opportunities in the private label market as it prepares to go public next summer, according to CEO Bill Glaser. It makes porkless rinds for grocery chain Trader Joe’s. The startup also is looking at joint ventures with big food for a plant-based egg product.

Better for you 

Unlike Hostess’, maker of iconic sugary treats, today’s startups are much more like Outstanding – focused on “healthier-for-you” versions of yesteryear’s snacks that promise less processed ingredients and higher nutrition content.

One example is The New Primal, maker of zero-sugar meat sticks. The startup is 18 months into a five-year growth plan to generate USD 100m in revenue and 5% to 10% EBITDA margins — a size that garners M&A interest from major industry strategics, cofounder and CEO Jason Burke said.

Another example is Gooder Foods, whose Goodles mac and cheese claims to offer more protein and nutrients than traditional brands without compromising on taste. Co-founded by Hollywood star Gal Gadot, the startup received acquisition offers from 13 consumer packaged goods companies while it was raising Series A funding in the spring. The brand wants to scale by itself first, so the buyout approaches were rebuffed, said founding CEO Jennifer Zeszut.

Once those startups show traction, another executive said, big food will indulge – and it won’t mind paying big.

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