Thursday, October 05, 2000

Stock Focus: Food Processing Companies

NEW YORK - Within the past 12 months General Mills anted up $10.5 billion to buy Diageo's Pillsbury food unit, European food and consumer products giant Unilever spent $21 billion to gobble up Bestfoods, and Philip Morris dropped $15 billion for Nabisco.

What's going on here?

"To stay competitive in the food business, you need a broad array of market-leading products in growing, on-trend categories," says Romitha Mally, packaged foods analyst at Goldman Sachs. "Size gives a company muscle with retailers," adds David Nelson of Credit Suisse First Boston.

The enterprise multiple is a good guideline for what acquirers pay for food companies. The enterprise value of a company--the market value plus total debt and the liquidation value of preferred stocks minus cash and equivalents--represents the minimum price an acquiring firm must pay to buy another publicly traded company. The enterprise multiple is the ratio of enterprise value to a company's operating income, or earnings before interest, taxes, depreciation and amortization.

Unilever (nyse: UN - news - people), for example, paid an enterprise multiple of 14 for Bestfoods (nyse: BFO - news - people). Using that deal as a guideline, we sought out food companies with enterprise multiples of 14 or less. All the companies on our list are profitable, trade below their 52-week highs, carry estimated 2001 price-to-earnings ratios below 22 and have projected three- to five-year earnings growth of 10% or higher.

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