Betting big on food and beverages

by Josh Sosland
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Stock Market
Gabelli manager sees 3G Capital, other forces as catalysts for value appreciation.

BOCA RATON, FLA. — Has the food and beverage business lost its appeal on Wall Street?

Since the middle of 2016, shares in food and beverage companies have significantly underperformed the broader stock market in what has been described as an investor rotation into other sectors.

To be sure, not every investment manager is running for the exit when it comes to food and beverage companies. In fact, Gabelli Funds L.L.C., part of GAMCO Investors, Inc., in February announced the listing and public trading of the Gabelli Food of All Nations Nextshares, a new actively managed exchange traded fund that will invest in food and beverage companies based in the United States and abroad.

In an interview with Food Business News, Kevin V. Dreyer, co-chief investment officer, value, at Gabelli, said the food and beverage industry is a “terrific sector with long-term tailwinds.” The interview took place Feb. 23 during the Consumer Analyst Group of New York annual meeting at the Boca Raton Resort and Club in Boca Raton.

Mr. Dreyer is manager of the Food of All Nations fund, which began trading Feb. 14 on the Nasdaq exchange under the symbol FOANC.

Mr. Dreyer said food and beverage investing is new neither to him nor to GAMCO.

Kevin Dreyer, Gabelli
Kevin V. Dreyer, co-chief investment officer, value, at Gabelli

“Food and beverage has always been an attractive sector to Gabelli, even if the firm is best known for media, telecom and industrials,” Mr. Dreyer said. “Really, food and beverage has been an important part of what we do for a long time, and that’s been my focus since I joined the firm in 2005.”

GAMCO, which manages nearly $40 billion in equity assets, notes that the food and beverage market is over $5 trillion globally and $1.5 trillion in the United States alone.

GAMCO seeks to find value for investors by identifying publicly traded companies with a share price below the Private Market Value (P.M.V.) and also identifying catalysts that will “surface” this unrealized value. GAMCO has defined P.M.V. as what an “informed industrialist would pay to purchase assets with similar characteristics.”

Mr. Dreyer said this investment approach has paid off in food in recent years when Gabelli held positions in Cadbury Schweppes ahead of when that company was broken up and Sara Lee Corp. before that company was broken up.

Investments
Mr. Dreyer said he is looking to populate the Food of All Nations fund with a diverse collection of solid food businesses with bright futures.

“We’ve been very successful looking for unique situations where companies might be subject to financial engineering or a takeover or some other catalyst that could create value,” he said.

Beyond the potential for catalysts, Mr. Dreyer said he is looking to populate the Food of All Nations fund with a diverse collection of solid food businesses with bright futures.

“I’m building a bottoms up portfolio of great companies we want to own for a long time,” he said. “We don’t buy companies just because we think they’re good takeover companies. We buy them first and foremost because we think they’re great businesses that generate a lot of cash flow; and have pricing power. (Frankly, we haven’t seen much inflation in a long time, but to the extent that comes back we think food and beverage companies are great inflation conduits. Not so much right now but this may be important years from now.)

“These companies don’t have to be actual targets for you to win. You end up in a situation where they will fix themselves and the stock price will respond, or if they don’t, an outsider may step in.”

One doesn’t need to look far in the food industry today to see a major catalyzing force, Mr. Dreyer said.

Kraft Heinz merger
3G Capital has made acquisitions such as Kraft Foods and H.J. Heinz.

“One of the most interesting catalysts to us is 3G Capital, looming,” he said. “We’ve seen already their impact happen in the industry, and we think that will continue to happen.”

In addition to making acquisitions such as the H.J. Heinz Co. and Kraft Foods, Inc. and attempting to acquire Unilever, 3G has had a marked impact on other companies by spurring many executive management teams to ratchet up efforts to cut costs and streamline operations.

The low interest rate environment is fueling acquisition appetites, Mr. Dreyer said.

“With the cost of capital so low, the buy versus build equation gets skewed toward buying,” he said. “We do think there will be continued consolidation and companies presenting here (at CAGNY) could be on the list for 3G.”

While valuations of food companies have risen from the averages of several years ago, Mr. Dreyer said prices haven’t climbed out of control. He cited as evidence the success of many acquisitions in recent years in which the buyer paid elevated multiples, even high teens or low twenties of EBITDA.

He explained, “You look at acquirer stock prices, not just in the food industry — whereas years ago an acquirer’s stock price would always go down on a deal announcement, they are going up now. Because the math says you can pay a good multiple and get to a good deal.”

Mondelez Peeps Oreos
Mondelez may be a takeover target because its profit margins are toward the low end of its peers.

Possible takeover targets Mr. Dreyer discussed were Mondelez International, Inc. and General Mills Inc. Mondelez may be a target because its profit margins are toward the low end of its peers, he said. Mr. Dreyer said the company’s shares have many paths to appreciation beyond being acquired by 3G Capital.

“There is no reason they can’t do significantly better than they are doing today,” he said. “They have a coffee venture they’ve partially monetized. They will probably fully monetize that over time. They can use that cash to buy back shares, pay down debt, do m.&a. themselves. They’re spending a good amount on capex, modernizing plants, and they could spend more to innovate. That said, a combination with Kraft Heinz makes a lot of sense. They’ve been together before, so there would be no anti-trust issues.”

Looking at General Mills, Mr. Dreyer zeroed in on the value of Cereal Partners Worldwide, a global breakfast cereal venture owned by General Mills and Nestle.

“C.P.W. is a terrific asset, one that is going to grow,” he said. “While everyone is focused on cereal consumption in the United States, if you close your eyes and think 10 years from now, globally, there will be lot more cereal consumption. C.P.W. will get their share of it. Who knows, maybe at some point Nestle wants to own all of that. 3G is not the only acquirer out there.

General Mills cereal
General Mills is another takeover target.

“General Mills can fix themselves. I’m sure they’ll try very hard in this environment. Demographics are on their side. That’s what is great about the sector generally. Over time it does well with population growth with an added benefit of the rising middle class around the world.”

This idea extends more broadly to the thesis behind the creation of the Gabelli Food of All Nations fund.

“Stepping back, think 10 to 12 years from now — Is it better to own companies with this emerging markets  exposure or that don’t?” he asked. “I think it’s better to have it.”
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