Big food’s scraps: A new battleground for contrarians

As firms sell struggling brands, smaller rivals with a knack for turnarounds can benefit

One company’s junk can be another’s treasure. Manufacturers of some of the world’s bestknown household brands are cleaning out their cupboards. Their castoffs may fare better with smaller owners.

Listed consumer groups are grappling with a sales slowdown: Shoppers are rejecting processed food in favor of fresher products, while social media is helping nimble startups win outsize market share with small marketing budgets.

Activist investors Dan Loeb and Nelson Peltz are pushing the likes of Nestlé and Procter & Gamble for faster action.

That is driving a wave of deals and many assets have fetched high prices.

Reckitt Benckiser last year sold its food division, including French’s mustard and Frank’s RedHot sauces, to McCormick for roughly 20 times earnings before interest, taxes, depreciation and amortization.

Such businesses are often still growing, but not fast enough for public companies that have ambitious top-line targets to meet. According to Dealogic, the average multiple for food-anddrink deals is 16.4 times so far this year, the highest since 2007.

But there are also bargains, like the batch of 19 Diageo liquor brands that sold for just 5.5 times Ebitda to privately owned U.S. distiller Sazerac this month.

Such brands need fixing. Small labels can flounder in a large organization because they compete with star brands for management attention and research-and-development spending. A packaging overhaul, rethink of distribution and push into new markets can boost demand.

Sazerac has grown sales of Paddy Irish Whiskey by onefifth since buying the brand from Pernod Ricard in 2016, where it had to vie with the big Jameson brand for resources. It is hoping to do the same with the likes of Myers’s Rum, included in the Diageo grab bag.

Some smaller listed players have spotted the opportunity. Frozen veg specialist Nomad Foods paid around 10 times Ebitda for careworn brands like frozen roast potato maker Aunt Bessie’s and Goodfella’s Pizzas.

It is betting that new ingredients can make frozen dinners more appealing to millennials. Nestlé’s frozen-food business, which Nomad is eyeing should the Swiss giant decide to sell, could be next. Since going public in 2014, the company’s shares have outperformed the S&P 500.

Certain castoffs are riskier. Brands can be difficult to salvage when an entire category is in decline.

To make a success of its $8 billion (U.S.) bet on Unilever’s margarine business—including brands such as Flora and I Can’t Believe It’s Not Butter—private-equity group KKR will have to revive the unfashionable spread or dramatically cut costs to pull off a profitable exit in a few years’ time.

Climbing obesity rates mean that candy and soda brands run the risk of being hit by sugar taxes and tougher regulations.

Sifting fixer uppers from nohopers is the challenge for contrarian stock pickers.

The same goes for companies looking to feed off the scraps of today’s embattled food-and-drinks giants.

The lesson of recent deals is that this may be easier lower down the food chain.