Slower year ahead for food and ag deals

BMO Capital Markets Managing Director, head of food and consumer group, Greg Pearlman speaks during the Reuters Food and Agriculture Summit in Chicago March 15, 2011.

CHICAGO (Reuters) - The food and agriculture sector will see fewer mergers and acquisitions in 2011 as high, volatile commodity prices limit the appetite for deals and chief executives wait for the right strategic buys.

Deal-making this year may also pale compared with 2010 because there is no longer the prospect of the Obama administration making changes to the U.S. capital gains tax.

With grain prices tripping multi-year highs this year, gauging the profitability of target food companies has become more difficult, said Greg Pearlman, head of the food and consumer group at BMO Capital Markets.

"On the food side, commod prices are having a big impact on M&A," Pearlman said this week at the Reuters Global Food and Agriculture Summit in Chicago. "That's having some downward pressure in M&A."

In 2010, the value of M&A deals in the sector topped $100 billion, but that was well off recent highs of 2007 and 2008, when commodity prices last spiked.

Breakups of companies like Sara Lee Corp (SLE.N) and Fortune Brands FO.N have garnered much of the M&A attention in the sector so far this year as they spin off or sell units to focus on core businesses.

Agriculture-focused companies, meanwhile, tend to be more interested in acquisitions at the bottom of the commodities price cycle, not at the highs, Pearlman said.

"There's still plenty of deal activity -- it's just not what it was second half of last year."

FINANCING MARKETS 'ROBUST'

Part of the reason for steady, although not spectacular, interest levels is the ample available financing for deals, unlike in the aftermath of the 2008 commodity price runup.

"The financing markets have been unbelievably robust for almost any kind of transaction from food, ag, specialty retail, all the way through restaurants," Pearlman said. "Almost anything with a brand can get financed at relatively attractive terms."

With the means available to do deals, volatile commodity costs may not be enough to scuttle many deals.

"Commodities don't drive acquisitions," said Bruce Carbonari, chairman and CEO of distilled spirits maker Fortune Brands. "An acquisition for us is first strategic."

Putting strategy ahead of scale is a popular theme among deal-making CEOs, Pearlman said.

"We came through the financial crisis and everyone lifted their head out of the foxhole," he said. "CEOs are talking about investing in their business, becoming more efficient. M&A is far from dead."

Anglo-Dutch food and consumer goods group Unilever Plc (ULVR.L) (UNc.AS) has started to make acquisitions following a quiet period after its massive purchase of Bestfood in 2000 for $24.3 billion in cash. It has made bolt-on acquisitions such as last year's purchase of Sara Lee's personal care business and its agreement to buy Alberto Culver, but does not envisage big deals.

"We have done more M&A last year than in the last 10 years, but we are looking at bolt-on deals, and not looking at transforming deals. We are confident we can meet our aim of doubling the size of the company without acquisitions," Michael Polk, Unilever's president of global food, home and personal products, said at the summit.

The greatest appetite for deals may be in the protein area of the food and ag sector -- especially beef -- because it is a uniquely global business, Pearlman said.

Sara Lee, for one, is looking for North American, protein-based food businesses, preferably after it splits its own businesses, chief executive CJ Fraleigh told Reuters.

Joe Sanderson, CEO of Sanderson Farms (SAFM.O), the No. 4 U.S. poultry producer, said he can see modest M&A activity ahead in his sector, but with high wheat and corn prices pushing meat processors into the red, big deals appear unlikely.

"I think people are having to use their balance sheets to protect themselves right now," he said.

The global fertilizer sector saw the world's biggest takeover battle last year until the Canadian government blocked BHP Billiton's (BHP.AX) pursuit of Potash Corp of Saskatchewan (POT.TO), but talk of mergers in the sector persists as crop nutrient prices track soaring grains.

Russian potash miners Uralkali (URKA.MM) and Silvinit SILV.MM are moving toward a merger that would make them the world's No. 2 potash producer, while speculation has circulated around Mosaic Co (MOS.N) becoming a takeover target when its largest shareholder, Cargill CARG.UL, puts its shares in play later this year.

But M&A becomes complicated when the biggest industry players seek to consolidate and it is costly for miners to enter the fertilizer business, making big deals in the sector no easy feat, said Mosaic CEO Jim Prokopanko.

"We'd like to get bigger because there's opportunity," he said. "We have size, we have scale, there's no burning survival (reason) to grow."

Still, for the CEO who knows what he or she wants, uncertain times can offer good buying opportunities, Pearlman said. While it is unclear how Japan's earthquake and nuclear crisis will affect investors and as spiking crude oil threatens the global recovery, the lack of talk about financial meltdown may embolden some buyers.

"If you're a strategic buyer, it's a perfectly good time not to be in the foxhole," Pearlman said. "There's willing buyers and willing sellers."

(Reporting by Rod Nickel, additional reporting by David Jones in London, editing by Matthew Lewis)