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Potential Food Mergers Sound Yummy to Some, but Others Gag

Does the Heinz-Bestfoods buzz augur industry-wide consolidation?

It's tempting to consider Wednesday's






tease as the appetizer preceeding a potential banquet of food mergers. After all, when sales are lukewarm, profit warnings are more common than a 31-day month and share prices are in the basement (all of which are true in this group), companies often react by deciding that misery loves company.

Not so fast.

Analysts say a potential Heinz-Bestfoods combination (reported in

The Wall Street Journal

Wednesday and immediately denied by Bestfoods) may make sense, but that doesn't mean other companies in the sagging food sector will -- or should -- immediately seek out their own partners.

"I don't see many deals that are screaming out to be done," says Craig Albert of

Sanford Bernstein


There are some logistical reasons why a consolidation spree may not follow. Many CEOs are young and relatively new on the job, and therefore aren't ready to cede power. And a lot of these companies' shares are owned by families that want to retain control of their stock.

But the key issue is that it's hard to come up with combinations that would do what's really needed in the food industry: Sell more food. "Most mergers wouldn't solve the growth problems that the industry has,"

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J.P. Morgan

analyst Erika Gritman Long wrote in a research report Wednesday.

Growth in the U.S. and much of Europe is hard to come by. At a time when millions of people are hypnotized by the sight of


making smoked trout hash on the

Food Channel

, no one actually cooks anymore -- they order takeout. For companies that do all or most of their business in those mature markets, "you aren't going to have growth in consumer staples," says Christopher Jakubik, an analyst with

Warburg Dillon Read


An oft-cited reason for food-company mergers is to better bargain with retailers, which are combining like never before. "



is more important.






are bulking up. Food companies need to respond," says John Carey, who manages the

Pioneer Fund

, which holds about a million shares each of Heinz and Bestfoods. "Consolidation makes sense for the industry."

But merging to cut costs, either internally or with retailers, simply isn't enough for the long term, argues Jakubik at Warburg. "At most, you'd get four consecutive quarters of improvement where you could take out some working capital," he says. In addition, most of these companies have already gone through one, two or three restructurings. If you believe the old low-hanging fruit thesis, there isn't much more serious cost-cutting left to do, beyond the usual culling of the back office and executive herds. Better terms with retailers will help things temporarily, but won't prompt faster top-line growth.

In order to make sense, two companies should be able to "sell more stuff together than apart," says Albert at Sanford Bernstein. That means taking advantage of opportunities to bring products to new markets, or to co-market products to boost sales.

Food companies need to look for partners that are growing in newer markets like Latin America and Asia, says Jakubik. "That's what a Bestfoods-Heinz merger would do," he says, noting that Bestfoods, the maker of mayo,


peanut butter and


soups, has the most extensive overseas reach of the major U.S. food companies.

Jakubik didn't want to speculate on possible match-ups, but says that



also has a strong international presence, followed by Heinz and

Ralston Purina


. Outside the U.S.,




are also found all over the world. The hard part, says Jakubik, is doing the calculus on which of those companies might fit with another, or whether any would hook up with another, smaller company that doesn't have such wide exposure.

To be sure, the pressure on CEOs to do something -- anything! -- may cause plenty of discussions. "The pressure's been building," says Albert. "If they believe that the discounted cash flow of company A plus the discounted cash flow of company B is bigger than apart, it's incumbent on them" to investigate.

Investigate away, says Jakubik. But the key is figuring out "which mergers would create value." If food industry executives follow his advice, the merger banquet may look a little less sumptuous.