Pershing Square’s Bill Ackman sees far more in the rapidly changing foods industry than simply an opportunity to buy stocks that will soon be taken out by acquisition hungry giants such as Kraft Heinz. Last week, when the Wall Street Journal first reported Pershing Square’s $5.5 billion stake in Mondelez, the immediate reaction was that Ackman was betting he could quickly press a sale of the company to Berkshire Hathaway Berkshire Hathaway and 3G Capital-controlled Kraft Heinz, netting a quick and easy return.
Pershing Square’s Bill Ackman sees far more in the rapidly changing foods industry than simply an opportunity to buy stocks that will soon be taken out by acquisition hungry giants such as Kraft Heinz.
Last week, when the Wall Street Journal first reported Pershing Square’s $5.5 billion stake in Mondelez, the immediate reaction was that Ackman was betting he could quickly press a sale of the company to Berkshire Hathaway Berkshire Hathaway and 3G Capital-controlled Kraft Heinz, netting a quick and easy return. However, when Berkshire bought aviation industry parts supplier Precision Castparts Precision Castparts for $32.3 billion a few days late, Berkshire’s Warren Buffett appeared to throw ice on the idea, stating in a CNBC appearance that Kraft Heinz has its “work cut out” over the next few years as both companies integrate their operations.
CEO Pershing Square Capital Management William A. Ackman rings the bell during the trading debut of his fund on the Euronext Amsterdam in Amsterdam. (Martijn Beekman/AFP/Getty Images)
So has Ackman’s Mondelez playbook been tossed out the window in a week’s time? Not really. In fact, a Thursday morning deal that Ackman’s adjacently involved in, Nomad Foods’ $780 million acquisition of European frozen foods firm Findus Group, underscores that the billionaire activist investor has big plans for the rapidly changing foods industry.
Nomad is guided by Jarden Jarden chairman Martin Franklin and it counts Pershing Square as both a 21.7% shareholder and a cheerleader as the London-listed firm hunts for acquisitions, mostly by negotiating deals in Europe for frozen foods companies owned by private equity firms who want to exit their investments. One of Pershing Square’s so-called ‘platform investments,’ Ackman’s calculus is that Nomad has the leadership to find brands at attractive prices and form a substantial company from scratch that operates at industry-leading margins.
With Mondelez, however, Ackman is going in a different direction.
He’s targeting one of the foods industry’s largest players, with some of the most established brands, for instance, Oreo cookies, Trident gum (not a food, technically), and Ritz crackers. There’s little adding to Mondelez’s brand portfolio that’s needed from Pershing Square, or any hand picked executive or board nominee. Instead, Mondelez, with its laggard margins, is one of the food industry’s most inefficient players and improvements are needed.
On Monday call with investors, Pershing Square partner Ali Namvar laid out the hedge fund’s cards on its investment. “We think Mondelez has by far the greatest cost saving opportunity among its peers.”
Pershing Square isn’t just flying blind into the situation. The firm was an investor in Cadbury before it was acquired by Kraft for $19.6 billion in 2010, and it liked the deal enough to then become a major Kraft investor as the acquisition closed. At the time, the fund believed Kraft was just beginning what could be an over half-decade cost saving plan, which could yield significant profits.
Ultimately, amid investor pressure, Kraft decided to split apart, forming a refrigerated foods company in Kraft Foods and a snack company in Mondelez. However, as independent companies, Kraft Foods and Mondelez both were somewhat slow on the uptake to deliver expected cost savings. Around that time, Buffett and 3G Capital bought Heinz and quickly wrenched out hundreds of millions in cost cuts, signaling that margin improvements were achievable. So much so, in fact, Buffett & Co. then bought Kraft Foods to undertake a similar cost cutting effort.
In the wake of that deal, Pershing Square, which liked Kraft’s acquisition of Cadbury far more than Buffett, decided the better opportunity lay with Mondelez. However, as Pershing’s Namvar told investors, Buffettt and 3G’s deal means the time to act is now. “Mondelez is at a critical inflection point, in that they are just seeing margins improve,” he said, citing second quarter results that showed a dramatic improvement in profitability.
“We think the whole industry is under change… 3G Capital is setting new benchmarks for efficiency, organizational structure and profitability. We think all of the leaders are looking at this and saying we need to evolve. The old ways of doing business won’t pass muster,” he added. Pershing Square took its stake in Mondelez for fear of missing out on gains as CEO Irene Rosenfeld begins to gain momentum in efficiency improvements.
Thursday’s Nomad Foods deal, in addition to Pershing Square’s roughly 20% stake in Burger King parent Restaurant Brands, should tell investors the hedge fund isn’t just a fly by night player in the foods space with only a plan to belligerently agitate for the sale of Mondelez.
That Pershing Square is just now taking a major stake in Mondelez, in fact, could have been predicted in 2010.
Here’s what the firm said about the cost saving opportunities ahead for Kraft in February 2010:
[Kraft] today: Pershing Square view — Turnaround is achievable
- Fixing a company like KFT (many brands, regions) often takes five+ years – Witness Cadbury, Unilever—only now seeing impact of several years of restructuring
- Investors have lost patience –-hence why the turnaround is discounted in the stock price
- Not just about cost cuts, but innovating and improving the brands through R&D and marketing
- New CEO has made smart decisions regarding brand investment and portfolio M&A
- Brands are better positioned today, given improved price/value equation and improved product quality
- Significant opportunities still remain in COGS and overhead—however some of it should be reinvested in the business to strengthen brands
- Clearly, MARGINS SHOULD BE MUCH HIGHER—we believe it’s a matter of time…
Bottom Line: Rather risking missing out on the looming changes to the foods industry, Pershing Square is acting now by buying up 7.5% of Mondelez. Also read FORBES’ April cover story on the restructuring of Twinkie-maker Hostess to see how other investors are making billions by transforming bloated snacks brands.
Article originally posted in Forbes website.