Is Keebler auction stale?
Maker of Fudge Shoppe has drawn few public bidders, leaving auction in doubt
NEW YORK (CNNfn) - Last July, Flowers Industries begrudgingly hung a "For Sale" sign on Keebler Foods' elf tree, hoping the sweet aroma of the No. 2 U.S. cookie and cracker maker might bring a healthy price and remove the sour taste in the mouths of Flowers' investors.|
At the time, the decision seemed as sound as they come. The food industry, spurred on by Unilever Plc's hefty $24.3 billion purchase of Bestfoods, was clearly ripe for consolidation. In fact, an auction of the No. 1 U.S. cookie and cracker maker Nabisco Group Holdings just two months earlier had sparked a wild bidding war and ultimately brought a whopping $14.9 billion price tag.
Yet three months later, investors and analysts alike are quietly wondering if anyone has a real appetite for the maker of Fudge Shoppe cookies and Townhouse crackers.
Few of the presumed favorites in the auction process have taken an aggressive lead, while at least two potential bidders assumed by most to be the most logical buyers have publicly expressed disinterest.
Meanwhile, few of the most common tricks used to drive up the asking price have occurred, most notably the practice of leaking information to media outlets, hoping to force a potential bidder's hand. All of which has food industry analysts scratching their heads and wondering if there's really any serious bidding going on at all.
"There's actually been very little buzz on this one," said William Leach, an analyst with Donaldson, Lufkin & Jenrette. "With the other deals, the bankers were leaking information out on seemingly a daily basis to drive up the price. With this, nothing."
"The buzz is that everyone is gone except maybe one bidder, even though the company is trying to send off a vibe that that's not true," said one analyst who asked not to be named.
Mum's the word
Indeed, both company officials and the bankers working the auction have been decidedly tight-lipped throughout the process.
Contacted this week, Flowers spokeswoman Marta Jones Turner apologized profusely, but then declined to provide any updates on the process. "I'm sorry, but all I can say is the auction process is ongoing and we hope to complete it by the end of the year," she said.
Analysts now seem largely split on whether Flowers (FLO: Research, Estimates) will ultimately find a buyer for Keebler, which makes everything from Cheese-It crackers to the Girl Scout cookies you buy each year, at an attractive price. But investors are clearly growing weary waiting for the auction process to heat up.
Keebler (KBL: Research, Estimates) shares closed down $1 at $39.88 Thursday and are now more than 13 percent off their 52-week high of $46.88, set shortly after the auction process was announced. Flowers' shares, incidentally, entered trading Friday at $19 per share, well off their 52-week low of $11.68, which was set early this year.
This is probably not the scenario Flowers Chairman Amos McMullian envisioned when he placed Keebler on the auction block. Under McMullian's direction, Flowers bought a controlling 55 percent stake in the Elmhurst, Ill.-based company after it went public in 1998 and the unit had always cooked up solid financial results.
For that reason, losing Keebler was hardly McMullian's first choice, insiders said. But some faulty equipment at Flowers' Mrs. Smith's bakery division was draining his company's profits and boosting debt, leaving him few options, particularly as competitors picked up rich premiums around him.
So he initiated a dual-pronged strategy, announcing the Keebler auction and a spin-off of Flowers' non-Keebler assets, including Flowers Bakeries and Mrs. Smith's, at the same time. McMullian even hired the same seasoned bankers at Morgan Stanley Dean Witter and UBS Warburg who handled the successful Nabisco auction to oversee Keebler's sale.
Kellogg may be lone bidder left
But despite investor's obvious enthusiasm for the idea - Keebler shares shot up more than 30 percent the day the auction was announced - the response from bidders has been decidedly more muted.
French food conglomerate Danone, a failed bidder for Nabisco considered by many analysts to be Keebler's most logical suitor, dropped out of the process last month, hinting Keebler did not provide enough scale for its worldwide biscuit strategy to warrant a pricey purchase.
Britain's Cadbury-Schwepps Plc, which also expressed some interest in Nabisco, likewise has indicated it has no interest.
That leaves two logical bidders remaining in the eyes of most analysts, Kellogg Co. and Campbell Soup Co., although neither is hinting even privately that their interest is any more than lukewarm at best.
Kellogg (K: Research, Estimates), best known for its expansive line of cereals, is considered the front-runner at this point. The Battle Creek, Mich.-based company has seen its dominant hold on the global cereal market slipping in recent years, leading investors to push for a more diversified product line.
The company already has a relationship with Keebler, which bakes Kellogg's Pop-Tarts, but analysts note the lack of a serious competing bidder gives it no reason to submit an aggressive bid.
"Kellogg is interested, but if they are the only one, then they don't have to pay up," said Romitha Mally, an analyst with Goldman Sachs.
The other logical bidder is Campbell, which itself has been struggling to jump-start around a sluggish bottom line and diversify its revenue stream as sales of its traditional soup line have slowed.
Analysts note Campbell (CPB: Research, Estimates), owner of Pepperidge Farm cookies and crackers actually boasts more synergies with Keebler than does Kellogg. But like so many others, the Camden, N.J. based company has shown little interest in getting seriously involved in the auction.
"It makes the most sense for Campbell, which has Pepperidge Farm but don't have the scale they need," said Andrew Lazar, an analyst with Lehman Brothers. "The also could use Keebler's distribution capabilities and could really use a business that grows. But then again, so could Kellogg."
What next if the auction goes stale?
The lack of interest has certainly caught industry watchers by surprise. After all, Keebler brings a number of top brands to the table along with a sound financial track record, have boosted revenues by nearly 20 percent to $2.67 billion and net income by nearly 40 percent to $131.2 million last year.
"I think a deal will still happen, it's just hard to say when," Lazar said.
If the bidding does not reach adequate levels, analysts said the only other real option for Flowers would be spinning its interest off to shareholders. But since that is unlikely to generate the kind of capital it was expecting from an outright sale, most expect Flowers to press forward with the auction, even if it takes longer than expected.
"Flowers clearly needs to sell it," Mally said. "At this point they don't have much of a choice."