General Mills May Be Vulnerable to Activist Funds

Could an activist hedge fund drive General Mills (GIS) , the maker of Yoplait yogurt and Pillsbury Cinnamon Rolls, to put itself up for sale? 

It's a real possibility especially given that Mondelez International (MDLZ) could be looking to make a big acquisition in the wake of its unrequited $23 billion bid for chocolatier Hershey  (HSY) last year.

Consider that a wolf pack of activists own large minority stakes in branded snack and confectionery products company Mondelez, including embattled activist investor Bill Ackman of Pershing Square Capital Management, Trian's Nelson Peltz and Jana Partners Barry Rosenstein.

Ackman on Monday reported hiking his activist Mondelez stake to 6.4% from 5.6%, reinforcing himself as one of the $68 billion market capitalization company's largest shareholders. In 2015, Ackman reportedly suggested that Kraft Heinz was a potential Mondelez buyer.

Peltz, another significant shareholder, sits on Mondelez's board and was recently described by a company spokesman as a "highly engaged board member." In 2013, Peltz and Trian urged PepsiCo  (PEP) to acquire Mondelez and spin off a division, but by 2014 the activist fund ended that effort.

Nevertheless, it's possible that the Ackman, Peltz and other activist funds have been agitating privately to have Mondelez consider selling itself or, alternatively, make a big transformative acquisition. That could make General Mills a target.

David Katz, the founder of $760 million value investment firm Matrix Asset Advisors, said he expects to see consolidation in the food space in 2017 and that Mondelez is vulnerable and could become an acquisition candidate in the months to come. If Mondelez doesn't want to be acquired, it could pursue an acquisition to help boost its stock price and make itself less attractive to a potential buyer. In that scenario, an acquisition of General Mills may make sense, he suggested.

"It's time for Mondelez to fish or cut bait, " said Katz. "We think an acquirer [of General Mills] could pay a significant premium and the deal would still be very accretive as a result of significant cost cutting and synergies between General Mill sand Mondelez."

However, Gaurav Gupta, principal at consultancy Kotter International, said he didn't think it would make much sense for Mondelez to buy General Mills, arguing that the Minnesota-based company's product portfolio is similar to what was in Kraft in 2012 when it was spun off, under pressure from Trian, from a business that became Mondelez. In 2012, Kraft separated its North American grocery business from its global snack food business, which it named Mondelez. "If I think about General Mills and their product portfolio it is very similar to what's in Kraft, following its split from Mondelez," Gupta said.

So far no activist has targeted General Mills. However, if one were to try to pressure the Minneapolis, Minn.-based $36 billion market capitalization company to sell itself, they would need to nominate dissident director candidates by June 29 in time for the 2017 annual meeting expected in September.

Neither General Mills nor Mondelez have poison pills or classes of stock with unequal voting rights, which means that either company could become vulnerable to a hostile bidder or activist director-election campaign. All directors are elected annually, which means that an insurgent investor could launch a change-of-control director election campaign right away.

Alternatively, Hershey, for example, had a trump card to play as a takeover defense: the Hershey Trust, which has a significant enough stake that it needed to be convinced. The Kellogg Foundation has a 19.9% stake in Kellogg (K) , another multinational food company, all of which could make life difficult for an activist seeking to agitate for a sale there.

If Mondelez doesn't make a play to make a transformative acquisition soon, it could come under activist pressure to be acquired. Speculation rose in December that Kraft Heinz and Brazilian private equity dynamo 3G Capital and possibly Berkshire Hathaway's Warren Buffett were close to a deal to take over Mondelez. The New York Post later reported that 3G Capital was likely raising funds to buy Mondelez on its own.

"Kraft Heinz has synergies and could be combined with Mondelez," Katz suggested. "Where there is smoke there is fire."

Kotter's Gupta said he doesn't believe a Kraft Heinz combination with Mondelez is likely, in part because he believes each company has different focuses. Similarly, Gupta contends that a 3G Capital combination is also unlikely given that Mondelez has already taken many of the cost-cutting steps the buyout shop would take to extract value.

An activist, however, could drive Mondelez to make other types of acquisitions. Gupta argued that Mondelez should follow its failed Hershey bid by trying to expand in the confectionery space, perhaps by making smaller acquisitions of either Nutella maker Ferrero International or Swiss chocolate company Chocoladefabriken Lindt & Sprungli. He added that Mondelez and General Mills could both make headway by making smaller acquisitions in the growing organic and healthy snack food space.

"If you are Mondelez you are not going to see very large growth from Oreo Cookies and those kinds of brands," Gupta said. "If you want growth in revenue it will have to come from healthier choices."

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