Inside Wall Street: Heinz May Be on the Takeover Menu

Get ready for another food fight: H.J. Heinz (HNZ) may be a takeover target.

When I last wrote about the food giant in my Inside Wall Street column in BusinessWeek's Oct. 12, 2009 issue, I tagged it as a potential takeover target, then trading at $39 a share. It has since leaped to $42, and may well continue to rise. The reason: After Cadbury (CBY) agreed on Jan. 5 to be acquired by Kraft (KFT), ketchup and baby-food maker Heinz now stands out as one of the few major independent food companies -- and in so many ways ripe for the picking.One global food behemoth that some savvy pros say would be the most logical and suitable buyer is Switzerland's Nestle (NSRGY), the acquisitive company with an array of widely known food and beverage brands, including Nescafe, Perrier, Kit Kat and Danone.

"The Kraft-Cadbury buyout deal makes a Nestle-Heinz combination all the more likely," says Mark Boyar, president of Boyar Asset Management, which has accumulated shares. At the same time that the Kraft-Cadbury deal was being finalized, Nestle on Jan. 5 agreed to buy Kraft's frozen pizza business (DiGiorno, Tomsbtone and California Pizza Kitchen).

A Compelling Story

This suggests to Boyar and other pros that Nestle has a further desire to increase its already large presence in the frozen-food category. Heinz is a big player in that business with brands such as Smart Ones, Ore Ida and Boston Market.

Investors, Boyar advises, shouldn't ignore the prospects of Heinz with its iconic brands because it could be as compelling a takeover story as the Kraft-Cadbury deal. He figures that the buyout value of Heinz is worth about twice what the stock is currently trading, or about $80 a share.

Acquiring Heinz would significantly increase Nestle's line of health-oriented products because about 50% of Heinz's portfolio is classified in the "better for you" category. Heinz's infant nutrition business, with its Plasmon products, would likely appeal to Nestle since infant nutrition, notes Boyar, is Heinz's fastest growing category. Nestle is already a market leader in that sector. Heinz ketchup and sauces accounted for 42% of 2009 sales, meals and snacks pulled in 43%, infant/nutrition 11%, and other products 4%.

In many ways, says Boyar, Heinz would present "meaningful revenue and cost synergies for Nestle."

Prepping for a Sale?

Ultimately, the key to a future deal may be in the hands of Heinz's activist board member Nelzon Peltz, whose Trian Partners owns 4.8 million shares, or 1.5%, as of Sept. 30, 2009. Peltz has a history of helping sell the companies in which he has a stake, after they've been turned around.

The most recent example is Snapple. Peltz played a big part in selling it to Dr Pepper, and it's now part of Dr Pepper Snapple Group (DPS). Boyar says Peltz has been helping Heinz streamline certain parts of its operations to make it more attractive to potential buyers. Heinz spokesman Michael R. Nollen told DailyFinance the company doesn't comment on speculation. Nestle didn't return a call for comment. A Trian Partners spokesperson declined to comment.

Wall Street hasn't been too upbeat on the ketchup maker because of its recent flattish sales and earnings. Of the 18 analysts who follow Heinz, 10 rate it a hold, and only seven recommend buying it. One rates it a sell.

Heinz's revenues for fiscal year 2009 (ended Apr. 30) rose a bit to $10.1 billion from fiscal 2008's $10 billion. And earnings in fiscal 2009 climbed to $2.90 a share from $2.63 in fiscal 2008. But for fiscal 2010, analysts see earnings sagging to $2.82.

Part of a Trend

One analyst who rates Heinz a buy mainly on fundamentals is Tom Graves of Standard & Poor's. The stock will get support from the above-average dividend yield of 4%, he says, and some underlying strength in the company's operations. He expects Heinz to invest further in its brands and focus on growth in the emerging markets, cutting costs and "leveraging the company's global scale."

Buyout pros are forecasting increased mergers-and-acquisitions activity this year. Recent examples of deals include the Mars/Berkshire Hathaway acquisition of Wrigley, Disney's purchase of Marvel, and the recent Kraft-Cadbury deal. Will there more consolidation in the food industry?

"We believe the recent trend of companies with strong consumer brands acquired at premium multiples will continue," says Boyar. If he's right, Heinz may turn out to be another appetizing opportunity for investors.
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