Packaged foods: increased appetite

The central aisles of a supermarket are dull even by the soul-destroying standards of big store retail. So it is striking that packaged food - frozen, tinned, shrink-wrapped, squeeze-bottled - is having a star turn. The success of 3g capital in raising margins at Heinz showed that staid food companies could contain hidden (tinned? frozen?) value; Heinz's purchase of Kraft made the scope for consolidation clear. The appeal of the asset class was reinforced by Monday's news that the special purpose acquisition company Nomad Holdings would buy Iglo group, the European frozen foods company from its private equity owners for €2.6bn.

The price of the latter deal equates to 8.5 times Iglo's earnings (before interest, taxes, depreciation and amortisation). This looks quite low. Compare it to another packaged food success story. Pinnacle Foods, which pushes frozen vegetables, cake mix, syrup and the like in the US, was taken private by Blackstone in 2007 and floated, complete with a heavy debt burden, in 2013. The shares have nearly doubled since. Its ebitda multiple is 13 - heady, given sales growth in the mid-single digits.

Pinnacle is not exceptional. The list of packaged food companies that trade at valuations out of line with their ho-hum growth rates are all over the capitalisation spectrum from Danone ($51bn in enterprise value), J.M. Smucker (jam, $16bn), Snyder's-Lance (pretzels and chips, $2.6bn) and Tootsie Roll (candy, $1.8bn).

In an ultra-low rate environment, investors who might have owned bonds are looking for super-stable alternative sources of returns and, as the saying goes, people have to eat. And, as in the Heinz and Pinnacle cases, the stability can serve as a platform for heaps of return-boosting leverage. Either way, it should not come as a surprise if rates rise and among the first share price casualties, right alongside the utilities and the real estate investment trusts, are food companies.

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