NEW YORK (CNNfn) - Merger and acquisition experts said Wednesday a possible union between Unilever Plc. and Bestfoods could set the table for a wave of consolidation not seen in the food industry for nearly 15 years.
The proposed $18.3 billion deal, which Bestfoods has resisted thus far, would provide the sector with its most groundbreaking merger since the mid-1980s, when such unions as Philip Morris (MO: Research, Estimates) and General Mills reshaped the industry's landscape.
Experts and analysts said the proposed Bestfoods deal would immediately ignite a number of mergers already brewing beneath the surface, particularly among companies fearful of losing ground in the race to build a national brand.
"This could very well be the trigger," said Julian Gething, a food industry merger and acquisition analyst with Arthur Andersen. "There's a number of different companies that are trying to solidify their global brand name. And with all of the trimming these companies have done, quite clearly a lot of them have been able to build up the firepower to pursue some deals."
A building wave
In reality, the industry's pending consolidation wave has been building for some time, analysts said.
For nearly a year now, investors have brushed food industry stocks aside in favor of trendy "new economy" stocks, leaving executives scrambling for ways to build shareholder value and keep impatient shareholders at bay.
Still, the battering quickly spread to all corners of the industry, leaving everyone from Sara Lee (SLE: Research, Estimates) to Nabisco Group Holdings gasping for air. Bestfoods (BFO: Research, Estimates) was no exception, losing nearly 60 percent from its 52-week high set just last November in less than four months time.
So after bulking up for most of the 1980s and 1990s, food companies were forced to begin scaling back, cutting entire operations and business lines, and using excess cash to trim debt loads and buy back shares, hoping to keep their stocks on life support until market trends reversed.
As a result, several companies managed to build a sizable war chest that suddenly can be used to target relatively strong acquisition targets at bargain prices.
Unilever provides the most pointed example of that phenomenon. Since announcing plans to shed 1,200 brands and slash roughly 10 percent of its workforce, the Anglo-Dutch company has become the industry's most active buyer -- spending approximately $3 billion this year to purchase three firms, including U.S. firms Slim-Fast Foods and Ben & Jerry's Homemade Inc.
"This is what I've been looking for," said John McMillin, an analyst with Prudential Securities Inc. "I think the landscape [for consolidation] of the packaged food industry is about to change for the better."
Wave will start small, but could grow big
Brad Akason, managing director of Arthur Andersen's corporate finance group, said a Unilever/Bestfoods deal would probably spark a series of mergers, most likely among mid- and small-cap food industry players, where acquisition talk is already heating up.
"We know some companies have been sitting there waiting for something big to happen," he said. "The need now is to be global. Both [Unilever and Bestfoods] are already so strong globally that a merger would just put additional pressure on others to make a move as well."
McMillin said he expects most of the consolidation to begin with a group of seven or eight companies with market capitalization's between $10 billion and $15 billion that he said "are big enough to survive, but not big enough to thrive."
Included in that group are H.J. Heinz Co. (HNZ: Research, Estimates), which was rumored to be in discussions with Bestfoods last year, Quaker Oats Co. (OAT: Research, Estimates) and Ralston Purina Co. (RAL: Research, Estimates).
Below that group is a second-tier of companies that most likely will end up filling holes for the industry's top players, analysts said
Included on that level is Nabisco Holdings Group (NGH: Research, Estimates), the holding company for Nabisco Holdings Corp. which made national headlines last month when corporate raider Carl Icahn, troubled by the company's ailing stock price, demanded the board seek a merger partner.
After making a merger offer of his own, Icahn later signed a confidentially agreement and agreed to work with the company's management to find a suitable merger -- either with himself or a third-party company.
The tricky part, analysts said, is where to value most companies. Bestfoods, analysts said, will ultimately likely agree to a merger with Unilever at a higher price than what is currently on the table because of its relative strength compared to the industry.
But with stock prices so low, most other companies don't have as much leverage, meaning industry giants like Philip Morris, Unilever and Nestle S.A. could find some real bargains when they decide to go shopping.