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Highly leveraged buyouts threatening competitiveness of US food companies.

Highly Leveraged Buyouts Threatening Competitiveness of US Food Companies

The impact of mergers and acquisitions on the U.S. frozen food industry continues to be a controversial topic of debate. It dominated the National Frozen Food Convention's general session panel discussion in Atlanta, Ga. Also addressed was the future of retail FF shelf space and the apparent slowing down of new product introductions. Quick Frozen Foods International has excerpted and digested some of the main points from the dialogue as follows:

On the subject of debt-burdened companies struggling to meet interest payments on loans:

"The most important customer then is the banks or those people who own the bonds. And that can lead you to take an eye off your customers. Your customers are important, but you damn well better make that payment at the beginning of the month or quarter - because if you don't it's all over," warned Richard Davis of J.C. Bradford & Co., an investment firm.

"I wonder if one of the problems is that perhaps Wall Street is altogether too bullish on mergers and acquisitions?," asked Steven McNeil of Campbell Soup Co. "A lot of time is spent generating acquisition rumors [when grounds for same] don't exist at all. That's what's pushing us."

Davis replied: "Definitely. It's unbelievable that Campbell Soup stock went up to almost $60 a share on simple rumors that somebody had to come in and take them over... Nestle or so and so. It's just a shame to see that happen because clearly Campbell was doing a lot of things to improve operations of the company. But a lot of whispers go on... and it just gets carried away. Like a lot of things, though, these excesses will get corrected..."

David Jennings of Stouffer Foods Corp. had this comment to offer: "I'm a free market type, but as I see it a company like Campbell has two types of stockholders. There are the ones who are interested in the way the company is run, its employees, products supplied to the public and, of course, long term returns. Then the other kind of stockholder is the in-and-out type who is only in it for the short term and could not care less what happens to people."

As far as James Cockburn of PYA/ Monarch, Inc. and Sara Lee Foodservice was concerned, the rash of highly leveraged buyouts should be ringing alarm bells in Washington. "You cannot borrow yourself out of debt," he advised. "The major reason we're having these problems is because of the credit system. It used to be popular to save and try to invest in the future. But you can't protect yourself from a takeover today if you're sitting there with a lot of cash. As a matter of fact, that puts companies into play. And the change in tax laws has been one of the principal reasons that put us there."

He continued: "We're dislocating hundreds of thousands of people in the process, and [leaving ourselves exposed] in the world market when the time comes that interest rates go up... We've got a lot of global competition, which means the Japanese and others will be able to take stronger positions in our companies when we default.

"Finally, the thing that worries me more than anything else is that we ultimately pay for all of this. If we have to add another ten cents per package to pay debt, we as consumers pay for it."

Moderator Ray Brady, a business correspondent with CBS News, asked why the U.S. Justice Department was not using anti-trust laws to check the concentration of companies into fewer hands.

"We're seeing a paradox here," replied Kathleen McDermott, a lawyer who represents the American Frozen Food Institute. "On one hand, smokestack industries and high-tech concerns are seeing their business go to the Japanese and are complaining that strict enforcement of anti-trust laws has hindered them from doing things together that might help them compete on the world market. At the very same time at home [domestic market industries], we're getting the view that if all anti-trust laws were enforced we wouldn't have [so many] mergers and acquisitions... I suspect that the answer lies somewhere in between... But you have to remember that anti-trust laws [were not designed to address] problems that tax laws necessarily create..."

Campbell's Steven McNeil received applause after voicing his opinion on the situation: "Frankly, we're not companies of lawyers or financial analysts. Yet we're turning all our attention to that - attention that we should be spending on selling more product. That's what we do well and have been doing well for years. Something that we don't do well is LBOs (leveraged buyouts), mergers and acquisitions. And it's a big expense that (affects) the cost of the product."

He went on: "All this has got us thinking very short term, which makes us more vulnerable to overseas competition. If we stop worrying about building our brands and franchises, investing in new stores and formats, and start worrying about quarterly earnings or cash flow - which an LBO drives - then the Japanese or somebody else [could] move into that situation and potentially take advantage of it."

At this point moderator Brady got a laugh by amending political advice given by French philosopher Voltaire in regard to dealing with certain unproductive layers of society: "We should strangle all the judges with the guts of all the lawyers.' And maybe we should add takeover artists to that list."

Thomas Zaucha of the National Grocery Association pointed out that one result of merger-mania has been the thinning of grocery wholesaler ranks from more than 1,000 a decade ago to fewer than 300 today. Some trade watchers predict that the number will be reduced to 50 by the year 2000.

Nonetheless, the future for independent retailers is bright, believes Zaucha: "With the help of technology (scanners, etc.), strong independent grocers continue to enjoy strong market shares."

Robert Schwarze of the National Food Brokers Association commented that mergers and acquisitions register pluses as well as minuses. Noting that some members are "feeling tremendous pressure," he elaborated: "In many cases when an acquisition goes through we could conceivably lose in 30 days a very large piece of our business... We're trying to encourage manufacturers [affected by takeovers] to let us continue functioning for a while and see if we can't manage both [of their] competitive brands."

The good news about mergers is seen in the expansion of food broker jobs. Employment rose some 21% in 1989 as the national sales force went from 34,000 to 42,000.

"Granted, there are fewer companies," said Schwarze, "but we see many opportunities... As supermarket chains like Winn-Dixie and Food Lion go into new markets, we go with them."

As new retail units come on line, what is the prospect for increased frozen food shelf space? That question was put to James Kufeldt of Winn-Dixie. His response was not very encouraging.

"There may already be excess capacity of frozen cases in today's environment," he warned. "Especially when you take into account the increase in deli operations, seafood counters, shelf stable offerings and produce... So, consumer demand will drive whether or not frozen case space will increase. At this point smaller stores don't have enough space, but we're building larger stores every year. However, there is a maximum cost relationship between the gross you get and the cost of handling frozen food. That will tend to limit how far you can go."

While Kufeldt did not use this venue to address the explosion of new products during the 1980s which has crowded available merchandising space, Campbell's McNeil suggested that the trend for the '90s will be toward rationalizing offerings. He explained:

"The average new frozen food product probably costs manufacturers $5- to $10-million in losses during the first year. During the second year you hope to break even, but maybe lose another $2- to $3-million. So, as we look at getting more competitive - and in order to support stock prices that are driven up - we are taking a more judicious look at new products and trying to do a better job researching them.

"Manufacturers are actually pulling more items off the market because we're finding that if we want to automate our plants we have to simplify things. And this means reducing the amount of variety, ingredients, and processing steps.

"There are an awful lot of hidden costs of complicity - such as having a dozen or so different coatings for fish sticks. By standardizing and simplifying processes we actually eliminate some products... So, I think you're going to see a good deal more restraint in the frozen food business."
COPYRIGHT 1990 E.W. Williams Publications, Inc.
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Title Annotation:Frozen Foods in North America
Publication:Quick Frozen Foods International
Date:Jan 1, 1990
Words:1446
Previous Article:Challenges to frozen food heating up, Winn-Dixie president tells convention.
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