A $36 Billion Deal Is a Sign Mars Sees Trouble Ahead

(Bloomberg Opinion) — Every shopper knows the dangers of going to the grocery store hungry.

But Mars Inc. is happy with its purchase: the $36 billion acquisition of Pringles chips and Cheez-It maker Kellanova.

It might seem an odd time to be adding foods that may be viewed as less than healthy, particularly with the potential impact on demand for snack foods from weight-loss drugs such as Ozempic.

But right now, Mars has a more urgent focus: lifting sales in the grocery aisle, which are under pressure from thriftier consumers and supermarkets’ private labels.

When food price inflation accelerates, as it has over the past couple years, so do the revenues of consumer packaged goods companies. This is now reversing; with less help from price increases, companies must sell more.

Kellanova has been performing well since it spun off its North American cereals business as WK Kellogg Co. late last year, growing faster than peers and recently raising its guidance for the full year. This sets it apart from many rivals who have trimmed their outlooks. Even so, North American packaged foods is the most pressured area of the grocery market.

With $63 billion in net sales, the enlarged company will be more able to resist any push from supermarkets for lower prices. It would have about 6.2% of the global snacking market, according to Jennifer Bartashus of Bloomberg Intelligence.

Together, Mars and Kellanova will control seven snack and confectionery brands generating over $1 billion of sales a year. This not only makes them muscular suppliers to supermarkets, but provides scope for coming up with innovative new products, something that will be necessary to win back consumers who have discovered that cheaper private labels are acceptable substitutes for household names.

The combined company should be able to push through efficiencies, helping it deal with pressure on margins from slowing price increases. This deal is being billed as all about growth, but cost savings will be useful in a more pinched environment.

Mars is also eyeing longer-term improvements. Its chocolate-heavy portfolio will be more balanced with savory items. Kellanova brings a presence in Africa and Latin America. Meanwhile, as the company braces for impact from weight-loss drugs, it adds healthier alternatives, such as cereal bar NutriGain — a useful addition to Mars’s Kind Bar.

That explains why Mars is paying up for Kellanova’s prospects. The $83.50 cash offer is a 33% premium to Kellanova’s share price before the Wall Street Journal reported news of Mars’ interest, and a 44% premium to the price in the preceding 30 days. 

The $35.9 billion enterprise value the Mars offer places on the company equates to just under 16 times this year’s earnings before interest, tax, depreciation and amortization, just ahead of Mondelez International Inc.’s about 15 times.

That looks like a reasonable exit for Kellanova shareholders, although perhaps not a knock-out. Some analysts had suggested a take-out price of at least $87. If there is a better buyer out there, there might be an opportunity to gatecrash — although an $800 million break fee would be payable. Unless another bidder emerges, the deal is expected to close in the first half of next year.

With concerns around the health of the US consumer intensifying, and grocery price inflation set to moderate further, more food manufacturers might see merit in stocking up.More From Bloomberg Opinion’s Andrea Felsted

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.

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