When Can We Short Food Stocks Again?

Is this the start of something big?

The question we have received most in the wake of Heinz being acquired by 3G with financing provided by Berkshire Hathaway is “who is next?”  We attempted to answer that question specifically in a prior analysis that highlighted some of the characteristics of Heinz that might have made it attractive to a cost-minded acquirer such as 3G.  Here, we attempt to answer the question behind the question which is whether or not we are poised for a wave of acquisitions across staples, specifically packaged food.


We are of the opinion that merger waves are a consequence of industry “disruptions”.  These disruptions don’t have to be single events, but can be built up over a longer duration and comprised of multiple smaller events, rather than a single significant event.  There isn’t a great deal of academic research to fall back on with respect to this topic – Mitchell and Mulherin (1996) argued that industry-specific merger waves occur as a “common response to regulatory, technological and economic shock.”  The new competitive dynamic requires a reallocation of capital within in an industry.


Interestingly, most “waves” occur during strong, broader markets with varying theories for this – access to capital or perhaps  a desire on the part of managers to trade “expensive” paper for “real” assets - Maksimovic and Phillips (2001) and Jovanovic and Rousseau (2001).  Interestingly, research suggests (unsurprisingly) that engaging in merger activity in strong markets and subsequent to prior deals in the same industry may not necessarily be a recipe for creating shareholder value.

Looking back at the wave of consolidation in packaged food in 2000 (see below), it appears that it was in response to a shift in the balance of power between manufacturers and retailers brought about by a prior wave of consolidation within food retail.  From 1996 to 2000, assets representing nearly $75 billion of retail sales were consolidated in US food retail, including two of the biggest combinations in history (Albertson’s/American Stores and Kroger/Fred Meyer).

Packaged food manufacturers were faced with a sea change in terms of relative power versus retail counterparts (recall that Wal-Mart was becoming an increasingly more significant participant in food retail at this time as well).  Scale mattered again, and, in fact, became an imperative versus larger retail partners.  The packaged food industry responded in kind.

2000 Was a Huge Year for Packaged Food M&A


Unilever approached Best Foods in May of 2000, with the deal price ultimately agreed to in June (approximately 10% higher than the original offer, total consideration of $24.3 billion).    Later that same month (June), Philip Morris (at that point still the tobacco/food conglomerate) agreed to acquire Nabisco for $15.5 billion.  The bidding for Nabisco was robust, with Danone and Cadbury as other engaged parties.

Though not the purchase of a public company, General Mills agreed to purchase Pillsbury from Diageo at the end of July for $10.5 billion.

In a smaller transaction relative to the food deals in 2000, Kellogg acquired Keebler Foods for $3.9 billion in October.  The year wasn’t quite over, as Pepsi acquired Quaker Oats in December for $13.4 billion.

Does the same imperative exist now?


We would argue, no.  If anything, we believe that food retail’s relative position has only weakened over the last decade.  Channel blurring is a familiar term for most investors and we have seen data that suggests that fully ¾ of consumers shop more than 5 CPG channels regularly.  Fewer trips and smaller tickets per trip to each retail channel has “spread the wealth” among various retailers and retail concepts to the point where conventional grocers (the catalyst for the last wave of packaged food consolidation) continue to struggle.  Certainly Wal-Mart’s importance continues to grow, but we see an acquisition that could successfully balance a supplier against Wal-Mart as being highly unlikely, if at all possible.

Further, since 2000, an entirely new channel has emerged – the natural and organic store.   The trend toward health and wellness has certainly represented a “shock” in some sense of the word.  Capital has been reallocated by the packaged food manufacturers to address this competitive disruption, but the size of the channel doesn’t allow for “mega” deals, so we don’t see this trend, while certainly powerful and ongoing, as a catalyst for large scale M&A.

Is age a factor?


There is some work that suggests that the age of CEO’s within a particular industry might be a catalyst for merger activity.  We only mention this because, Bill Johnson of Heinz, at age 64, was the oldest of the CEO’s in large cap packaged food.  Denise Morrison at Campbell Soup and Irene Rosenfeld at Mondelez are “next in line” at age 59, with Ken Powell of General Mills close behind.


Where does this leave us?


It appears that some conditions have been met for a “wave” of merger activity – a strong market, access to liquidity and perhaps the age of the relevant CEOs.  However, we are simply not seeing the “shock” to the system that forces companies to pursue acquisitions in an environment where current valuations make the creation of shareholder value through mega deals an uncertain prospect at best.


If no more deals, what’s next?


We decided to take a look at the performance of the S&P Packaged Food Index into and subsequent to some recent, large transactions, as well as the performance of the indices in 2000.  No question, if we are at the start of a wave of consolidation within packaged food, there is room to run – trough to peak relative performance in 2000 for the index was +46%.  Wrigley in 2008 as a “one off” event represented far less compelling relative performance, but as everyone is well aware, ’08 is a difficult year to which one can (or should) draw analogies given market conditions.  Ralcorp (the first time around) is useful - +8% relative performance; 27 days later (call it a month).  Right now, with Heinz, the numbers stand at +6% relative performance, 14 trading days post-deal.  That suggests to us, using Ralcorp as an example, that we have some more time and price before it becomes “safe” to short packaged food stocks again.


When Can We Short Food Stocks Again? - Merger Wave


When Can We Short Food Stocks Again? - Wrigley


When Can We Short Food Stocks Again? - Cadbury


When Can We Short Food Stocks Again? - Ralcorp1


When Can We Short Food Stocks Again? - Ralcorp2


When Can We Short Food Stocks Again? - Heinz



Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


Today we bought Constellation Brands (STZ) at $43.21 a share at 3:21 PM EDT in our Real-Time Alerts. Hedgeye Consumer Staples Sector Head Rob Campagnino wanted to sell it higher and wait for an oversold signal. Here it is. His fundamental thesis on STZ or the pending deal has not changed.




Here are some more details regarding the February gaming revenues in Macau





Total table revenues grew 12% in February.  Mass revenue growth was strong at 31%, in-line with its 6-month trailing average.  VIP revenues grew 5%, a little better than its 6-month average.  Junket RC volume was the most disappointing, falling -0.4%, the 1st decline since October 2012.  




Table revenues grew 28% YoY, led by a 76% surge in mass revenues - the market growth leader for the past month.  We estimate that Sands China held at 2.80% vs 3.17% last year, adjusted for direct play of 16%.  

  • Sands fell 24% YoY, as VIP revenues tumbled 45% due to low hold (1.9% vs 4.1%).
    • Mass grew 15%
    • VIP was down 45%.  We estimate that Sands held at 1.9% compared to 4.1% in the same period last year.  We assume 10% direct play in February vs 11% in February 2012.
    • Junket RC increased 19%, the 2nd consecutive monthly gain
  • Venetian grew 30% YoY 
    • Mass increased 43%, matching its highest growth since November
    • VIP grew 20%
    • Junket VIP RC fell 16%, its 11th decline in the past 12 months
    • Assuming 28% direct play, hold was 3.93% compared to 2.76% in February 2012, assuming 27% direct play 
  • Four Seasons dropped 63% YoY as hold was only 1.6%
    • Mass revenues fell 19%
    • VIP tumbled 68% and Junket VIP RC fell 28%. 
    • If we assume direct play of 14%. hold in February was 1.56% vs. 3.22% in February 2012 when direct play was ~16%
  • Sands Cotai Central produced $221MM in February, a new record
    • Mass and VIP hit new monthly records, $75MM and $146MM respectively 
    • Junket RC volume of $4.077 BN, up 22% MoM and a new high
    • If we assume that direct play was 11%, hold would have been 3.18% 



Wynn table revenues grew 6% in February. 

  • Mass was up 16% YoY 
  • VIP grew 4%, the 1st growth in 5 months  
  • Junket RC fell 8%.  Aside from a 1% gain in November, 9 of the last 10 consecutive months have been in the red.
  • Assuming 11% of total VIP play was direct, we estimate that hold was 3.12% compared to 2.79% last year (assuming 10% direct play).



MPEL table revenue only grew 1%.  Hold was very low at 2.40% vs 3.00% last year. 

  • Altira revenues fell 10%, with a 25% increase in Mass and a 14% decline in VIP
    • VIP RC fell 12%
    •  We estimate that hold was 2.63%, compared to 2.72% in the prior year
  • CoD table revenues grew 6% YoY
    • Mass grew an impressive 45%, offset by a 10% drop in VIP
    • RC grew 24%
    • Assuming a 18% direct play level, hold was 2.30% in February compared to 3.17% last year (assuming 16% direct play)



Table revenue grew 2%

  • Mass revenue declined 3%, its 1st decline since December 2008 and the laggard in the market
  • VIP grew 5%
  • Junket RC declined 1%
  • Hold was 3.05%, compared with 2.89% last February



Galaxy table revenues grew 25%, aided by high hold.  Mass grew a robust 57%, while VIP grew 17%.  Across its two owned properties, Galaxy held at 3.60% vs. 2.50% in February 2012.

  • StarWorld table revenues rose 13%
    • Mass rocketed 35% higher
    • VIP grew 10%
    • Junket RC fell 26%, marking the 9th month of consecutive declines
    • Hold was normal at 3.34% vs. an easy comparison of 2.26% last February
  • Galaxy Macau's table revenues grew 38%
    • Mass grew 72%
    • VIP grew 29%, while RC fell 6%
    • Hold was high in February at 3.80% vs. 2.75% last  year



MGM table revenue grew 8% in February

  • Mass revenue grew 19%
  • VIP revenue grew 6%, on flat RC growth
  • If direct play was 9%, then February hold was 3.29% compared to 3.19% last year






LVS’s MoM share increased 1.0% to 21.4%, the biggest monthly share gainer.  February's share was better than its 6 month trailing market share of 20.0% and better than the 2012 average share of 19.0%.

  • Sands' share lost 60bps to 2.9%, a new low.  For comparison purposes, 2012 share was 3.9% and 6M trailing average share was 3.8%.
    • Mass share ticked down to 5.1%, a new low.
    • VIP rev share fell 80bps to 2.0%, a new low.
    • RC share was 2.8%, up 20bps MoM
  • Venetian’s share ticked up 80bps to 9.2%.  2012 share was 7.9% and 6 month trailing share was 8.0%.
    • Mass share rose 110bps to 15.2%, its highest level since April 2012
    • VIP share increased 100bps to 6.7%, its highest level since Jan 2012
    • Junket RC share was unchanged at 4.0%
  • FS lost 90bps to 2.1%.  This compares to 2012 share of 3.7% and 6M trailing average share of 3.1%.
    • VIP lost 140bps to 2.3%
    • Mass share was flat at 1.5%
    • Junket RC gained 80bps to 4.2%
  • Sands Cotai Central's table market share gained 160bps to 6.8%, a new high, and compares to the 6M trailing average share of 4.6%.
    • Mass share rose 1.2% to 7.9%.
    • VIP share jumped 1.9% to 6.4%
    • Junket RC share rose 1.0% to 5.8%


Wynn's share gained 0.6% to 11.8% in February.  Wynn’s 2012 share averaged 11.9% and their 6-month trailing share averaged 11.5%.  

  • Mass share of 8.4%
  • VIP share of 13.2%, up 0.7%
  • Junket RC share increased 40bps to 12.3%



MPEL’s lost 160bps of share, the biggest share donor in February, to 12.8%, below their 6 month trailing share of 13.8% and their 2012 share of 13.5%.  

  • Altira’s share fell 90bps to 3.3%, below its 6M trailing share of 4.0% and below its 12-month share of 3.9%
    • Mass share grew 0.5% to 1.4%
    • VIP tumbled 160bps to 4.1%, a new low
    • VIP RC share fell 60bps to 4.8%
  • CoD’s share fell 80bps to 9.3%.  February’s share was below the property’s 2012 and 6M trailing share of 9.4% and 9.7%, respectively.
    • Mass market share grew 2.2% to 12.2%, a new high
    • VIP share fell 2.0% to 8.1%
    • Junket share rose 30bps to 9.6%



SJM’s share fell 0.8% to 25.5%.  February's share compares to their 2012 average of 26.7% and its 6M trailing average of 26.5%.

  • Mass market share fell 3.3% to 27.1%, an all-time company low
  • VIP share rose 50bps to 25.8%
  • Junket RC share lost 0.6% to 27.7%


Galaxy lost 0.1% share to 18.4%, below its 2012 average share of 19.0% but in-line with its 6 month average

  • Galaxy Macau share increased 0.6% to 10.8%
    • Mass share declined 20bps to 9.5%
    • VIP share increased 1.0% to 11.3%
    • RC share lost 10bps to 9.8% 
  • Starworld share fell 50bps to 6.8%
    • Mass share fell 40bps to 3.0%
    • VIP share fell 70bps to 8.3%
    • RC share decreased 10bps to 9.8%



MGM gained 0.9% share to 10.1%, above their 6M average of 9.8% and above their 2012 share of 9.9%

  • Mass share decreased 0.8% to 6.1%
  • VIP share grew 1.5% to 11.2%
  • Junket RC fell 60bps to 10.2%


Slot Revenue


Slot revenue grew 17% YoY to $155MM in February.

  • LVS took the top prize for YoY growth of 60% to $47MM
  • Galaxy’s slot revenue grew 8% to $18MM
  • MPEL grew 9% YoY to $26MM
  • MGM slot revenues grew 46% to $28MM, a new high
  • WYNN had the worst performance, falling 24% to $19MM
  • SJM lost 6% to $16MM






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Oil Prices Head Lower

Over the last month, the US dollar has strengthened considerably, which in turn has helped deflate the great commodity bubble brought on by the policies of the Federal Reserve. Over the last month, Brent Crude oil has fallen from $119 to nearly $110 a barrel. Lower oil prices are a tailwind to recovery in the economy and help increase consumption. More consumption is a boon for stocks as consumers spend more instead of worrying about the price at the pump.


Oil Prices Head Lower - usdoil

More Evidence of Housing Strength

Takeaway: The MBA Mortgage Application survey is yet another piece of data that confirms our strong housing thesis.

Here’s why Financial Sector head Josh Steiner is highlighting the MBA Mortgage Application Survey that came out earlier this morning. It’s showing year over year strength, up 20.2%, which he says is important because it was one of the few housing indicators that wasn’t signaling strength – at least before today’s report. Here’s a chart that shows the MBA Survey’s year-on-year growth.


More Evidence of Housing Strength - housing1

JCP: Why Firing Johnson Is The Fastest Path To Ch11

Takeaway: Contrary to what others are recommending, we think that firing RJ is the fastest way to realizing the liquidity crunch bear case.

Conclusion: Contrary to what others are recommending today, we think that firing Ron Johnson is just about the stupidest thing that the JCP Board could do right now. If they did fire him, we think that it would be the quickest path to bankruptcy for JCP. Sentiment seems to us that the stock would go up on that news. But if we saw him ousted we’d likely short this name with impunity -- even with the sell-side capitulating at a price of $14/15. We think losing Johnson would pose significant vendor/brand risk, and would back JCP into a corner to liquidate its real estate at a discount.


A new CEO would be faced with a binary decision tree. Either A) Return to being the lowest-quality department store in America, or B) carry out Johnson’s shop-in-shop plan better than RJ could on his own. Johnson clearly blew himself up in 2012, but we don’t put blind faith in the ability for anyone to come in and implement this plan any better. Keep in mind that 75% of the problems JCP has had have little to do with changing up the shop format and upgrading the merchandise assortment – it was largely due to RJ getting the pricing/marketing/value proposition wrong on the existing merchandise. Letting RJ run with the current plan might carry more risk as 2013 unfolds – but doing it without him is riskier, with potentially more significant financial pain.

1) First off, once a cucumber becomes a pickle, you can’t reverse the process. It already has architected its square footage to new shops, chosen new partner brands, and gotten rid of hundreds of vendors to make room for what is coming down the pike. That cannot be undone, which leads us to the conclusion that a new leader would need to move forward with the current plan – or something pretty darn close to it. Unfortunately, JCP does not have the liquidity for a new CEO to shake the Etch-a-Sketch clean, start over, and create a new plan. The lack of capital deprives JCP of the oxygen needed to go down a new path.
2) Ron Johnson has spent easily a third of his time ensuring that the right brands/vendors are chosen, and then collectively working with the brands and his merchants to make sure that the right product is in the right place inside the store. Whether you like RJ or not, the reality is that the vendors still like him – a lot. They buy into the long term vision (even if no one on Wall Street does). We’re relatively certain that at least a few large vendors would balk at rolling out product inside JCP if leadership and strategy changed dramatically.  
3) If that were the case, JCP would be left half-pregnant.  It wouldn’t be able to fill the shelves quickly with legacy product (i.e. become the old, poor quality JC Penney), and the product that should ultimately drive traffic under the new plan is at risk of never becoming a reality. Then we can build to an algorithm where comps are down another 20-30%, and not only is JCP forced to use its full revolver, but to liquidate its real estate, which we estimate to be worth about $1.8bn-$2.1bn (see our note from last night “JCP: Duration Matters More Than Ever’) to fund operating losses.
4) Allen Questrom, the Godfather of retail (we mean that in a complimentary way), was on CNBC today talking about why RJ should be fired immediately. He said that the Board needs to admit its mistake and move on. At face value this carries a lot of weight given that Questrom is the only person to successfully turn around JC Penney. But let’s be real. When Johnson went down the path of ‘reinventing’ JCP, Questrom did not make the cut of people he leaned on to consult about a solution. Questrom likely viewed that as a snub, and also probably has little patience for anyone that is seemingly destroying something that he worked so hard to fix. Not really a shocker that Questrom is on the short list of people recommending that he’s ousted due to 2012’s failures. Also keep in mind that he’s on the short list of people that would be considered for the top job (though we have no reason to think that he’d want it).


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