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Kraft’s Cadbury bid could foretell M&A boom

By Caroline Scott-Thomas , 20-Nov-2009
Last updated on 25-Nov-2009 at 18:25 GMT2009-11-25T18:25:30Z

Kraft’s Cadbury bid could foretell M&A boom

Kraft’s pursuit of Cadbury could mark the start of a surge in M&A activity for the sector as consumers’ focus on value supports a stable outlook for food manufacturers during 2010, Fitch Ratings has predicted.

The US food industry, although by no means immune to the effects of recession, has not fared as badly as many other sectors. It has been repeatedly pointed out that after all, everybody needs to eat. However, consumers’ eating habits have changed as they seek out products that they consider to represent better value – for example through increased use of coupons and promotions, or by switching from branded to private label products.

Director at Fitch Judi Rossetti said: “Looking ahead at 2010, the outlook for the packaged foods companies remains stable as we expect positive free cash flow…Moderate input cost inflation, cost savings from productivity initiatives and pruning of low margin products should allow investment grade packaged food companies to expand margins in 2010.”

The rating agency predicts that due to the relative stability and maturity of the packaged food sector, it is likely to struggle to organically generate impressive sales and earnings during 2010. Therefore, it envisages that large acquisitions in core categories could be used to expand and strengthen companies’ global presence, particularly in emerging markets such as Russia, India and China.

“Large acquisitions, such as Kraft’s quest for Cadbury and its growth in developing markets, may be just the beginning of an M&A boom for the sector,” the agency said. “However, large acquisitions with significant debt financing would likely lead to ratings downgrades upon initially higher debt burdens.”

Fitch said that the global recession has had mixed effects on food manufacturers. On the plus side, consumers’ emphasis on value has meant that they are more likely to eat at home, but this in turn has had a negative impact on manufacturers’ food service businesses.

Fitch Ratings cites US government figures, which show the Consumer Price Index is forecast to increase 3 to 4 percent in 2010, while ‘food at home’ is forecast to grow 2.5 to 3.5 percent. Inflation in the category has been well above long term averages, at 4.2 percent in 2007 and 6.4 percent in 2008.

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