Among many measures that may be used to measure an industry’s vitality, activity centered on mergers and acquisitions usually ranks near the top. After all, what is a better gauge of the desirability of a business than active pursuit by both strategic buyers within the affected industry as well as by acquirers that have targeted a company, and thus the industry within which the company operates, for diversification or expansion?
Hardly any industry has felt this force to a greater degree than food manufacturing where price-earnings ratios for the shares of many public companies reflect a premium attributed to likely acquisition interest or a discount for the opposite reason. Historically focused on makers of consumer products, the direction of food-related acquisitions has abruptly taken a new direction. This is the result of the surprising announcement that one of the world’s largest food ingredient makers has agreed to be acquired by a leading global chemical company that had made its first foray in this direction a little more than a decade ago.
Of course, the reference is to the purchase of Danisco A/S, with headquarters in Denmark, by the U.S.-based E.I. du Pont de Nemours and Company. That DuPont, which reached toward the food industry in 1999 with its purchase of Pioneer Hi-Bred International Inc., is now in the process of purchasing a business directly involved with making and marketing food ingredients signals a decision that has significance across the entire food industry. After all, DuPont is committing $5.8 billion to buying the outstanding shares of Danisco as well as taking on $500 million of debt. Considering that it paid $7.7 billion for the Pioneer hybrid seed corn business and that the Danisco price represents 23 times earnings in the most recent fiscal year, the commitment DuPont is making to its “farm to fork” strategy looms as the largest investment ever made in a business that doesn’t often see such numbers.
In announcing the transaction, Ellen Kullman, chief executive of DuPont, stressed two aspects of Danisco’s business. One is the company’s pioneering biotechnology work aimed at developing enzymes to be used in producing fuels from farm waste. This work, already under way in collaboration with DuPont, places the company front and center in making so-called cellulosic ethanol from grasses, straw and similar materials. One goal is to reduce the quantity of corn used to make ethanol. Indeed, some analysts commenting on the acquisition gave primary importance to this work.
But Ms. Kullman leaves no doubt that supplying food ingredients for the expanding world population, especially in developing nations, is central to her strategy. Citing expanding demand and a desire to protect the environment, she asserted, “We are well aligned with these megatrends in the area of increasing the quantity and quality of food and decreasing dependency on fossil fuels.” She underscored Danisco’s position in supplying sweeteners and cultures to make foods, implying that the combined research capacity of the companies offers future progress in food processing and innovation. In its last fiscal year, two-thirds of Danisco’s sales of $2.4 billion came from food ingredients and the balance from commercial enzymes.
While Danisco is a known force in the international food business, DuPont stands as a new player. This is so even though DuPont traces its origins to the founding of America. Its recognition as one of the world’s major industrial corporations hints of different approaches to the food business. Yet, it also signifies confidence in the future development of food manufacturing in the United States and around the world. Thus far, this transaction has sparked interest in other food ingredient specialty manufacturers that have public listings and thus might be takeover targets. Whether or not this
“heralds a deal spree,” as one commentator predicted, DuPont’s entry into food ingredients signifies the underlying strength and global promise of the food ingredient business as well as of its customers in food manufacturing.