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Andrew T. Gillies is Director of Communications at the Center for Audit Quality, an affiliate of the American Institute of CPAs, in Washington, DC. Based in Washington since 2002, he has also worked in editorial and communications roles at the Investment Company Institute, the World Bank, Forbes, and Vault.com. His policy-themed writing has focused on aerospace and defense, energy and environment, transportation, and financial services.

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.

Full story at Forbes.com