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Mergers on the Verge

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Kraft’s another company that never figured it needed anyone else to be great. Through generous line extensions and takeovers in the baked-goods and cereal aisles, Kraft’s got tons of supermarket mindshare, and it generates a decent, if not spectacular, return for parent Altria (né Philip Morris). Before P&G-Gillette, Kraft managers figured they were safe from an acquirer and couldn’t do much better combined with anyone else anyway. Now another once-high-flying packaged-goods company needs to buy Kraft just to maintain its own standing as a growth company, a standing that has been tarnished by four years of underperformance: Coca-Cola. That’s right, the $100 billion behemoth has been losing fizz for four years. It will take a transforming deal like a buy of Kraft to get back to generating the growth that the market expects of a company that lately feels like a helpless soda jerk. Think a KO-Kraft combo is far-fetched? Anyone who listened to the now-historic P&G-Gillette conference call heard longtime Gillette shareholder Warren Buffett praise both companies for recognizing the need to combine to compete in a business world gone global. Coke’s had a string of failed chieftains; if this new fellow, Neville Isdell, doesn’t break the tailspin, it’s safe to assume that the problem isn’t management, it’s the stalled business itself. A Kraft-Coke combo looks as made-to-order as the Pepsi buy of Quaker Oats, a deal that everyone now regards as shrewd.

If Coke can’t swing Kraft, Sara Lee or Heinz would also make a huge amount of sense: A Gillette-based valuation takes Heinz to $45 and Sara Lee to $34 (they were at $38 and $24, respectively, late last week). But unlike Kraft and Kimberly-Clark, neither SLE nor HNZ has the fundamentals going for it. They do, though, have viable dividends north of 3 percent, more than you can get from cash, so you’d get paid to wait until something develops. Sara Lee makes the most sense given its recent disappointing earnings report . There are other candidates in the consumer-products sector: Down-and-out Revlon would get you almost a double if a Gillette-style bid surfaced, and Avon would give you a 16 percent return at a Gillette valuation. But neither company’s CEO seems inclined to want to give up the job—Revlon’s Jack Stahl’s relatively new, and Avon’s Andrea Jung seems to be the CEO-for-life type. But, again, the P&G-Gillette deal makes them attractive enough to buy as specs. It wouldn’t shock me to see $100 billion Nestlé put a move on General Mills—“only” an $18 billion company. They’ve been partners in cereals worldwide, and it wouldn’t take much to make that union formal.

Then there’s Colgate. For six years, Colgate’s been stuck at about $55 as it’s battled both P&G and Gillette for supremacy in the health-and-beauty arena. The P&G-Gillette merger seems like a textbook pincer move against Reuben Mark’s beleaguered toothpaste-and-soap company. Of all the companies in the sector, it has the fewest options—too small to go it alone, and too expensive on an earnings basis to be acquired. No wonder its stock declined two bucks on the P&G-Gillette news. Colgate’s stock would have to fall 10 percent just to get to the valuation that Procter paid for Gillette. The most likely scenario: Colgate, too, goes on the acquisition hunt to spend the currency it has before it loses it, along with the shelf space it will most likely have to cede to a more-powerful-than-ever P&G.

Oh, and don’t forget Goldman Sachs and Lehman Brothers. Both stand to make so much money from all this M&A activity that they could end up being even bigger winners than the targets themselves. Given their mastery of the global takeover environment, Goldman under $110 and Lehman under $100 make huge sense. Who knows? In a world where brands matter more than ever, they too could succumb to the merger mania that 2005 seems to promise. Citigroup, are you listening?

James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time.


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