U.S. Food Firms a Hot Item on European Menu

By JAMES FLANIGAN

May 28, 2000 12 AM PT

It’s fitting perhaps, in a time when investors are nervous about “new-economy” and “old-economy” stocks, that the food industry--which is basic economy--should be creating excitement.

It’s an excitement rooted in changing lifestyles and eating habits as much as industrial patterns. Less cooking from scratch, more prepared foods, warehouse stores, bigger supermarkets and home delivery all tend to make the world’s leading brands more valuable than ever.

And name brands are a big reason for the takeover bids that are now adding zest to a stock market otherwise gone stale.

It’s uncertain as yet if a full-blown merger movement will put heft on food-company stocks, which have lagged behind the general stock market. But the action so far points to greater value for U.S. and global brands. It also signals the venturesomeness of European companies, which are leading the charge.

The Anglo-Dutch Unilever Group, maker of Lipton tea and soup, Dove soap and Wisk detergent, thinks enough of Skippy peanut butter, Best Foods and Hellmanns mayonnaise and the worldwide Knorr soup brands to offer $18.4 billion, or $66 a share, for Bestfoods, the New Jersey-based company that makes them.

Bestfoods wants more than $70 a share, so it is toying with Unilever by talking about joint product ventures with Diageo, the London-based owner of Pillsbury baked goods, Guinness Stout and Burger King.

And Bestfoods may succeed in getting a higher price. Unilever, a giant firm with $46 billion in annual revenues, is spending freely. It paid $2.6 billion last month to buy Ben & Jerry’s Ice Cream and Slim-Fast diet food, playing both ends against the middle, as it were.

Food retailers, too, are buying. Royal Ahold, a Dutch owner of supermarkets worldwide, this year added U.S. Foodservice, a supplier to restaurants and health-care facilities, to its expanding Ahold USA division, which includes the Stop & Shop chain in Eastern states.

Ahold and other European supermarket companies concentrate on selling just one leading brand of any item plus the retailers’ own labels. Roughly 45% of goods sold in British supermarkets and 35% of items on German and Belgian supermarket shelves are the stores’ own labels, compared with less than 20% in U.S. markets.

But U.S. warehouse stores such as Costco and Wal-Mart’s Sam’s Clubs and Supercenters also follow the leading-brand-plus-store-brand pattern. And warehouse retailing is growing. Wal-Mart now has 753 Supercenters and 465 Sam’s Clubs, and Costco is suffering profit pains from opening stores so rapidly.

Those trends favor the strongest brands--Best Foods mayonnaise, Kellogg cereals, Heinz ketchup--but spell trouble for also-ran labels.

Does the consumer resent shrinking choice? Not really. Consumers like low prices, which are available at warehouse stores because they work on a different profit system from the average supermarket. Warehouse stores take a 12% markup on a wholesale price from a food supplier that has been bargained down to begin with. Supermarkets add more than 30% to the wholesale price to cover costs of running the store, such as the labor to stack vegetables so neatly, plus a profit.

Yet warehouse stores are often preferred by food suppliers because “they can make money on the higher sales volume,” says analyst Ann Gillin-Lefever of Sanford C. Bernstein & Co., a New York investment research firm.

Also, consumers don’t want to spend time shopping. That’s the secret behind the rise of Webvan Group, HomeGrocer.com and other online retailers, which deliver to the home. Busy working couples, especially those with children, don’t have time to walk supermarket aisles. Many working mothers are willing to pay a premium if they can be assured of good-quality produce and meat.

Still tiny, online retailers promise the return of an old-fashioned service with a new-age twist--even though stocks of online retailers have tanked as Wall Street investors have reversed their initial enthusiasm for the companies.

The connection to the budding merger movement in food is that all those trends favor leading brands. Yet companies such as Heinz, Campbell Soup and Kellogg have been selling at relatively low stock prices because their sales growth has been meager and their profits, though strong, haven’t appealed to investors hyped on technology.

Food stocks have risen somewhat lately, spurred by the bids for Bestfoods and a takeover fight for Nabisco Holdings, the maker of Oreo cookies that was spun off by RJR, the tobacco company.

The outcome of the Bestfoods deal will tell a lot about how strong the merger movement will get. Bestfoods has a very successful global product in Knorr, which sells almost $4 billion worth of soups a year in Europe and Latin America, according to research by analyst John McMillin of Prudential Securities.

That’s why Unilever is bidding for it and why other European companies such as Diageo, Nestle and Danone--the French producer of Dannon yogurt that is bidding for Nabisco--are eyeing U.S. food companies. They see opportunities to build on the already strong presence of brands such as Heinz and Kellogg in Asia and other emerging markets around the world.

So despite a weak euro at the moment, the European companies are buying U.S. food companies. Why aren’t U.S. companies also reaching out to merge? Partly because one of the richest companies, Philip Morris, which owns a highly successful food company in Kraft, is tied up in tobacco litigation.

Also, says analyst Gillin-Lefever, Europeans are less worried about short-term stock market earnings and stock market fluctuations and are taking the long view of building a presence in the global economy.

Significantly, perhaps, as American investors debate the real worth of technology companies, Europeans see value in the fundamental industry of food.

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Food Chain[

Takeover offers have boosted some U.S. food company stocks, while others still sell at low prices compared to the average of all stocks. Here’s a look at several U.S. food companies and European companies bidding for acquisitons.

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‘99 sales Fri 52-wk

U.S. Companies Ticker (billions) ’99 EPS* Close Hi Lo

Bestfoods BFO $8.6 $2.48 $62.75 66.19 35.75

CampbellSoup CPB 6.4 1.63 31.69 47.00 25.44

GeneralMills GIS 6.3 1.70 41.00 43.94 29.38

Heinz H.J. HNZ 9.3 1.29 41.81 50.44 30.81

Kellogg K 6.9 0.83 29.44 40.94 20.75

Nabisco Hldgs NA 8.3 1.34 46.63 47.00 26.75

Europeans Diageo DEO 19.3 2.19 34.19 46.63 24.38

Royal Ahold AHO 33.5 .90 26.63 37.31 20.63

Unilever UN 46.3 1.70 52.75 74.19 39.25