Food Firms Hope Deal Whets Sales

By MELINDA FULMER

July 18, 2000 12 AM PT

TIMES STAFF WRITER

General Mills Inc. is betting $10.5 billion that it can revive such sagging brand names as Green Giant and Old El Paso with the acquisition of the Pillsbury unit from British food and beverage giant Diageo.

Continuing the rapid consolidation in the food industry, the marriage of cross-town Minneapolis rivals announced Monday would create a food powerhouse with $13 billion in sales that executives hope would grow faster than either company would on its own.

But, experts say, it’s a marriage that would take a little work. Though growth at General Mills has been running ahead of competitors at about 6% a year, Pillsbury’s sales growth has slowed as it has lost market share to rivals in many categories such as frozen vegetables and Mexican food.

To keep up, analysts say, General Mills would have to make a bigger investment in marketing and new product development.

“Pillsbury’s fundamentals aren’t improving and in some cases they are getting worse,” said Jim Barrett of Josephthal & Co. in New York. “General Mills is significantly adding to its debt level to buy a business that needs an injection of innovation.”

“General Mills has been pretty innovative with items like Go-Gurt and Cinnamon Toast Crunch,” said John McMillin of Prudential Securities in New York. “Hopefully they can add some innovation to these [Pillsbury] brands to help them gain share.”

General Mills’ stock fell $1.31 to close at $35 on the New York Stock Exchange.

General Mills intends to sell Pillsbury’s Green Giant canned-vegetable business because of its low profit margin. It will keep the Green Giant frozen-vegetable business.

Although both companies began in Minneapolis as flour-milling operations, today only their line of baking mixes overlap. General Mills plans to sell Pillsbury’s dessert unit to avoid antitrust scrutiny.

The proposed deal caps a string of consolidations in the food industry as its biggest players have looked to mergers to cut costs and boost slowing growth. Philip Morris, which already owns Kraft, recently agreed to acquire Nabisco Holdings. Dutch-British Unilever agreed to purchase Bestfoods, which owns Hellmann’s mayonnaise and Skippy peanut butter, and ConAgra is buying International Home Foods, maker of Chef Boyardee products and Pam cooking spray.

Under the terms of the deal, Diageo will receive about 33% of the combined company, about 141 million shares of General Mills stock valued at about $38 a share, or $5.4 billion. General Mills also assumes about $5.1 billion in Pillsbury’s debt.

The transaction is expected to close in December 2000.

The Diageo stake comes with clauses that prevent it from increasing its ownership and indeed requiring it to sell its portion of the company within 10 years.

The General Mills-Pillsbury alliance could put added pressure on other companies such as H.J. Heinz & Co., Campbell Soup Co. and Kellogg Co. to grow through mergers or acquisitions. And it could force Swiss giant Nestle to make another acquisition, analysts speculated, or purchase some of the units being discarded in the latest round of acquisitions. Nestle is the only one of the top three food companies not to have announced an acquisition this year.

Nestle officials could not be reached for comment.

These mergers could give the top food companies even greater clout with retailers and greater access to supermarket shelves--at the expense of smaller companies, analysts say.

Supermarket officials, however, claim such mergers are enabling the big food companies to hold down price increases by reducing their costs.

“If they can produce something for less certainly they will take their share of the profit, but ultimately it will assist our customers in slowing the rate of price increases,” said Jack Brown, chief executive of Upland-based Stater Bros. Markets.

Brown said that as the country’s largest manufacturers focus on their top sellers, they will shed some of their poorly performing brands, creating opportunities for other firms to revive those lines.

By cutting administrative and marketing costs and achieving greater economies of scale, the company expects cost savings of about $25 million next year, growing to $400 million by 2003.

General Mills officials said they would also use Pillsbury’s extensive worldwide distribution network to expand its distribution into new global markets. General Mills uses a network of joint venture partners to sell its products outside the United States.

But perhaps most important, General Mills officials say, the acquisition would help the company move more solidly into the fast-growing convenience market through Pillsbury’s line of refrigerated dough products, toaster breakfasts, Totino and Jeno’s pizzas and snacks, Progresso Soups and Old El Paso Mexican food products.

“When you add it all up, you’ve got two big trends in food today, convenience and health,” said Austin Sullivan, a spokesman for General Mills. “This puts us right on track with what consumers want.”

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Cake Mix

His: Pillsbury

Green Giant vegetables

Haagen-Dazs ice cream

Hungry Jack pancake mixes

Old El Paso Mexican foods

Pillsbury baking products

Poppin’ Fresh biscuits

Progresso soups

Toaster Strudel pastries

Totino’s frozen pizzas and snacks