Takeover Targets: Consumer Stocks in Play

(Takeover Targets: Consumer Stocks in Play report updated with detail about PepsiCo.)
NEW YORK ( TheStreet) -- Corporate dealmaking is staging a comeback in 2011 after hitting a six-year low in 2009, and a roster of consumer stocks represent potentially lucrative targets.

Rumors of Starbucks ( SBUX) looking to acquire Peet's Coffee ( PEET) may have been laid to rest -- for now -- but overall M&A activity in the U.S. was up 85.1% year-over-year in the first quarter, indicating future acquisitions across the consumer sector are likely on the horizon. Global M&A was up 28.9% in the first three months of this year.


"Leveraged buyouts likely will remain a persistent theme, as private equity and other buyout firms look to put dry powder to use before capital commitments expire," noted Morningstar analyst R. J. Hottovy earlier this year. "We also expect acquisitions to have a global feel in 2011, as domestic firms look to both established and emerging markets for takeover candidates to enhance anemic domestic returns during the last few years."

In March General Mills ( GIS) acquired a 51.5% stake in French yogurt maker Yoplait in a deal valued at $1.1 billion. HJ Heinz ( HNZ) also looked overseas for growth, announcing it acquired 80% of Brazil's Coniexpress S.A. Industrias Alimenticias, maker of the Quero brand of ketchup and condiments.


Other firms looked to growing niche markets for expansion. Anheuser-Busch InBev ( BUD) said last week it would pay a combined $38.8 million to acquire Chicago-based craft brewer Goose Island Beer; and Coca-Cola ( KO) exercised its right to acquire the remaining portion of organic bottled tea maker Honest Tea for an undisclosed amount.

"With further stabilization in the credit markets, we also expect a handful of blockbuster strategic acquisitions this year, many of which could change the landscape of their respective industries," Hottovy added.

Here then is a roundup of potential M&A targets in the consumer sector. Read on to see who the prime targets are likely to be ....

Sara Lee ( SLE)

Sara Lee

Company Profile : Downers Grove, Ill.-based Sara Lee is a global manufacturer and marketer of brand-name products for consumers throughout the world focused primarily on the meats, bakery, beverage and household products categories. Brands include Ball Park, Hillshire Farm, Jimmy Dean and Sunbeam.

After rejecting recent takeover bids from Brazilian meat giant JBS and private-equity firm Apollo Group, Sara Lee announced in January that it will split into two separate publicly-traded companies by early 2012. Sara Lee will also pay shareholders a special $3-per-share dividend in 2012.

Under the split Sara Lee will separate its North America retail and food-service business from its international beverage and bakery unit. The North America division will retain the Sara Lee name.

"Rumors have surfaced over the last few months that SLE has garnered interest from both financial and strategic buyers, and we consider the consumer product firm to be a takeover target, particularly given that its corporate oversight remains in question after CEO Brenda Barnes stepped down for health reasons in August, making it vulnerable to bids," noted Morningstar analyst Hottovy.

Wendy's Arby's ( WEN)

Wendy's Arby's

Company Profile : Atlanta-based Wendy's Arby's is a fast-food restaurant company, which is comprised of the Wendy's and Arby's brands.

Leveraged buyouts of Burger King and CKE Restaurants in 2010 indicate that "private equity's appetite for restaurant operators is unlikely to subside in 2011 given long-term franchise agreements and strong cash flow profiles," Hottovy noted.

Wendy's Arby's chairman Nelson Peltz received an oral inquiry from an unnamed third party, according to a June, 2010 filing with the Securities and Exchange Commission.

"However, WEN's leverage profile could make a leveraged buyout more challenging," Hottovy concluded.

Scott Rostan, Principal and Founder of Training The Street, pointed out that investors should think separately about Wendy's, a well-respected burger chain, and Arby's, an underperformer.

Wendy's Arby's, or just one of the brands, could be targeted by private equity firms, Rostan said, though the company previously had private equity ownership.

Since the Arby's brand has been underperforming, any acquirer would be looking at the company as a turnaround story, he added.

General Mills ( GIS)

General Mills

Company Profile : Minneapolis-based General Mills is the manufacturer and marketer of branded consumer foods sold through retail stores. It also supplies branded and unbranded food products to the food service and commercial baking industries. Brands include Cheerios, Yoplait, Progresso, Nature Valley and Green Giant.

General Mills appeared on a "potential targets" list by equity research firm UBS last fall.

In March General Mills ( GIS) acquired a 51.5% stake in French yogurt maker Yoplait in a deal valued at $1.1 billion.

The deal is likely to close by the end of the first fiscal quarter.


Rostan said he'd be surprised if a bidder emerged for General Mills, unless it were another large-cap packaged food company like Nestle ( NSRGY), though the multinational has made moves into products geared more toward babies. Unilever ( UN) would be an unlikely buyer, he said, because it concentrates more on personal care. Kraft Foods ( KFT) would also be unlikely, given that it's still digesting its acquisition of Cadbury.

General Mills is a "very sizable company," Rostan said, with granola and other health-oriented product lines, especially with its own recent Yoplait acquisition.

If some form of M&A were to emerge involving General Mills, it would "have to be a merger of equals with a Campbell Soup ( CPB) or maybe an HJ Heinz ( HNZ)," Rostan mused, "combining forces for market space and brand power."

Hain Celestial Group ( HAIN)

Hain Celestial Group

Company Profile : Melville, NY-based Hain Celestial manufactures, markets, distributes and sells natural and organic specialty and snack food products and natural personal care products. Brands include Arrowhead Mills, Earth's Best Organic, Healthy Valley, Spectrum, Celestial Seasonings teas, Rice Dream and Terra Chips.

Hain Celestial also showed up on UBS' "potential targets" list in September of last year.

The small-cap is more of a niche player, specializing in teas, organics and healthier snack options, meaning it's well-positioned to capitalize on the growing healthy lifestyle trend.

Rostan said Hain could be an interesting target for one of the second-tier food conglomerates like General Mills, Kellogg ( K), Campbell Soup and HJ Heinz. He cautioned, however, that Hain trades at a premium to those plausible buyers so "valuation might be tricky."

Kellogg ( K)

Kellogg

Company Profile : Battle Creek, Mich.-based Kellogg and its subsidiaries are engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods. Brands include Rice Krispies, Cheeze-It, Frosted Mini-Wheats, Nutri-Grain, Eggo, Famous Amos and Morningtar Farms.

Another of UBS' "potential targets," Kellogg falls under the same mid-tier category with General Mills, Rostan said, along with Campbell Soup and Heinz.

Kellogg could be listed as both a target and as a buyer, Rostan told TheStreet; it could look to expand in fast-growing categories as General Mills expanded in the yogurt market.

"I'd be surprised if any of the other top-tier companies like Nestley, Kraft or Unilvere make a bid for Kellogg -- they don't need to -- but it could come together with another mid-tier firm if forced by industry dynamics," Rostand said, such as if Danone ( DANOY) made a play for Heinz or General Mills. "That would force the hand of a Kellogg or Campbell Soup to do something."

Lorillard ( LO)

Lorillard

Company Profile : Greensboro, N.C.-based Lorillard is engaged in the manufacture of cigarettes and tobacco in the United States. Its principal products are marketed under the brand names of Newport, Kent, True, Maverick and Old Gold with sales in the United States of America.

"The only logical buyer for Lorillard would be another tobacco company," Rostan said, though regulatory uncertainty about its flagship Newport brand and a potential ban on menthol cigarettes means any bidders "would be wary to double down.

Morningstar's Hottovy noted that "when the smoke clears on the FDA review of the menthol cigarette category, we expect Lorillard to emerge relatively unscathed."

"The Newport brand has immense loyalty and is declining at a much slower rate than the broader industry," the analyst added. "We think it would be a crown jewel in the portfolio of Reynolds American ( RAI) or Imperial Tobacco ( ITYBY)."

Sonic ( SONC)

Sonic

Company Profile : Oklahoma City, Okla.-based Sonic operates and franchises a chain of quick-service drive-in restaurants in the United States.

Similar to fast-food peer Jack in the Box ( JACK), Sonic is not a national brand, yet it does boast a loyal, cult-like following, Rostan said.

Any buyer would be looking to figure out how Sonic could compete with the big-name fast-food players like McDonald's ( MCD), Burger King, Wendy's and Subway -- yet without the same resources and massive scale.

"It could be an interesting story for a private equity firm that wants to improve operations and take the chain national -- or even international," Rostan added.

Still, bigger-name quick-serve chains like McDonald's likely wouldn't emerge as a bidder, he added, as their styles of service and franchise models are so different.

Jack in the Box ( JACK)

Jack in the Box

Company Profile : San Diego-based Jack in the Box owns, operates and franchises its namesake quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants.

"Following Chipotle's ( CMG) impressive fundamentals during the last year, buyout firms and strategic buyers alike could be attracted to Jack in the Box for its Qdoba concept alone," noted Hottovy.

"We also think the namesake brand is poised for a turnaround following menu management, reimaging, and refranchising efforts," the analyst added.

Rostan considers Jack in the Box to be roughly in the same category with Arby's, meaning it's a second-tier fast-food burger chain that lacks a national presence.

He said it would be logical for a private equity firm to consider a buyout of Jack in the Box, though he conceded that no material bidder has emerged and so, as in the still-struggling housing market, the longer the property sits on the market without a buyer, the longer people start to wonder what's wrong with it.

Rostan suggested a that a fairly aggressive strategy would be to acquire both Arby's and Jack in the Box, "but that's a lot of execution risk." For the right kind of turnaround specialist, and a sweet spot of pricing and timing, someone could be willing to take that on, he ventured.

Hansen Natural ( JACK)

Hansen Natural

Company Profile : Corona, Calif.-based Hansen Natural, through its subsidiaries, develops, markets, sells, and distributes beverages including sodas, juices, teas and energy drinks in the United States and internationally.

"Monster Energy is one of the very few beverage brands that has been able to hold its own in an industry dominated by behemoths Coke and Pepsi ( PEP)," noted Hottovy.

The analyst said international expansion opportunities remain for the energy drink brand of Hansen Natural after the company has mostly completed its U.S. distribution roll-out.

Hottovy said any takeover bid that could emerge for Hansen is likely to come "at a substantial premium to the current market value."

"Coca-Cola is the obvious suitor because Monster is already distributed on the Coke platform," Hottovy said, adding that "an LBO would also make sense here."

Peet's Coffee & Tea ( PEET)

Peet's Coffee & Tea

Company Profile : Emeryville, Calif.-based Peet's Coffee & Tea sells fresh roasted coffee, hand selected tea, and related merchandise in several distribution channels, including grocery, home delivery, foodservice and office accounts and company-operated retail stores.

Rumors of Starbucks looking to acquire Peet's Coffee may have been laid to rest -- for now -- but the floodgates are now open for another bid to emerge.


Rostan said Peet's could yet prove to be a profitable niche brand for Starbucks, or other smaller coffee players like Caribou Coffee ( CBOU), though, in the case of Caribou, Peet's is more likely to be the buyer than the target.

Some kind of merger with Dunkin' Donuts, which is reportedly considering a $500 million initial public offering , is unlikely, Rostan said, since Dunkin's image is about "the average Joe getting coffee" less than a corporate focus.


Any combination of the smaller coffee brands, like Peet's, Caribou or smaller independent coffee names, would benefit the group as it works to expand its footprint and compete against the big players like Starbucks, McDonald's and Dunkin, Rostan added.

Avon Products ( AVP)

Avon Products

Company Profile : New York City-based Avon Products is a global manufacturer and marketer of beauty and related products.

Avon Products has delved deeper into personal care product interest of late, Rostan pointed out, which could prove attractive to large caps in that space.

Colgate-Palmolive ( CL) comes to mind, especially after the multinational agreed in March to acquire Unilever's ( UL) Sanex brand of personal care products for $954 million. The deal also included Colgate selling its Colombia-based laundry detergent business to Unilever for $215 million.

The high end of personal care products does very well in terms of revenue, Rostan said, and it's a growing segment of the industry.

Any bidder would have to consider that Avon's business model of direct customer approach is "interesting but completely different than other larger players," he said.

Rostan added that it would surprise him from a strategic standpoint if companies like Revlon ( REV) or Loreal, those with more traditional business models, would want to expand into that kind of distribution, but that a private equity buyer could be interested.

PepsiCo ( PEP)

PepsiCo

Company Profile : Purchase, N.Y.-based PepsiCo is a global food, snack and beverage company, which manufactures or uses contract manufacturers, markets and sells a variety of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods.

Pepsi appeared on UBS' "potential targets" list last fall, but Rostan said the food and snack conglomerate is more likely to be a buyer than a target.

Pepsi has a history over the last few years of acquiring smaller beverage brands, such as SoBe in 2000 and IZZE in 2006, just as Coca-Cola ( KO) acquired Vitamin Water in 2007.

The large cola companies are looking to expand into perceived health drink brands and enhanced water brands, Rostan said, as the general trend toward healthfulness grows.

Diet Coke recently overtook Pepsi as the No. 2 soft drink in America , so PepsiCo has "a stagnant growth problem it needs to address," Rostan said.


That PepsiCo has a substantial snack business in FritoLay bodes well for its buying potential. It could purchase Hain Natural, for example, Rostan ventured, or other smaller food brands. Recall that in 2000 PepsiCo won out over Coca-Cola to purchase Quaker Oats in a $13.4 billion deal.

The only buyers big enough to buy a huge company like PepsiCo would be Nestle or Kraft, Rostan said, but that scenario is highly unlikely.

It's more likely that PepsiCo might divest a few brands and even add a few as it looks to "turbocharge its business," he added.

But both Coke and Pepsi recent bought their bottlers, Coca-Cola Enterprises ( CCE) and Pepsi Bottling Group, respectively, and continue to fully integrate them, so neither are expected to be on the hunt for making any significant purchases in the near future.

-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here: Miriam Reimer.

>To follow the writer on Twitter, go to http://twitter.com/miriamsmarket.

>To submit a news tip, send an email to: tips@thestreet.com.

READERS ALSO LIKE:




>>See our new stock quote page.

Get more stock ideas and investing advice on our sister site, Stockpickr.com.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.