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Chapter 1: What recent M&A deals are shaking up the food distribution industry?
It is merger mania this week. This is Motley Fool Money. Welcome to Motley Fool Money. I'm Tyler Crowe, and today I'm joined by longtime Fool contributors Matt Frankel and Lou Whiteman, with three of us being part of the Hidden Gems team here at Motley Fool.
As we said, there has been a lot of movement in the merger and acquisition field in the past couple of days, and we're going to try to break down as many of those deals as we can. Also, we're going to get to some listener questions. To start, let's go with a lot of the deals that's going on in the food industry. We had two doozies.
There must have been a lot of lawyers and investment bankers putting in extra hours this past weekend. First, we got news on Monday that Cisco, the food distributor, not the networking hardware company,
Chapter 2: How significant is Sysco's $26 billion acquisition of Restaurant Depot?
was acquiring private retailer Restaurant Depot for $26 billion. We'll get into the details in a second here. But I think that was going to be the headline deal we're going to talk about. Then this morning, we had an even bigger deal where McCormick basically said, hold my beer, because they decided to merge with Unilever's food division in a $44 billion deal.
What makes that striking is that McCormick itself is a $14 billion company, and Cisco doing a $26 billion deal was a $30 billion company. These are massive transformative changes in pretty sleepy consumer brand food distribution businesses. Personally, as I looked at the initial deals, I was a little dubious. But if forced to choose, I would probably say the Cisco deal looks a little bit better.
But I wanted to turn to you guys and see what you guys thought of both of these.
Chapter 3: What does McCormick's $44 billion merger with Unilever's food division mean for the market?
I'm going to start with you, Matt. Are either of these deals making Cisco or McCormick more attractive
I'd agree that the Cisco deal is the more interesting of the two to me. If you're not familiar, Cisco is the largest food service distributor in the United States. I had a short career in the restaurant industry many years ago. I worked at a total of four restaurants across two states. Cisco was the primary food supplier for all of them.
That's among the other 700,000 restaurants it serves worldwide. It has a massive distribution network. It gives it a major efficiency advantage over its competitors. On the other hand, Restaurant Depot, it's a network of in-person wholesale restaurant supply warehouses. Think of it as like a Costco or a Sam's Club, but specifically for restaurants.
It's carved out a very nice niche among restaurant owners who value flexibility in pricing over the convenience of the national distributor, Cisco.
Yeah. As Matt says, Restaurant Depot is a much different business, arguably a better business, better margins, decent cash flow. It better be because Cisco is paying a price that's higher than Cisco's multiple. They are hoping to see their business improve because of Restaurant Depot. Real question for me is, can they get this done? Last time Cisco tried something like this with U.S.
Foods, antitrust got in the way.
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Chapter 4: What are the implications of major consumer brand mergers?
It's a decade later. And as I said, they are different businesses. But, you know, we'll see how it plays out. Tyler, I do have to say, though, you said interesting. And to me, back when I was in dealmaking world, there was nothing more interesting than a reverse Morris Trust deal. McCormick gets it just for interest, just for that, because they are doing this.
They're using this kind of cool thing where they are merging with part of Unilever and Unilever gets to spin it off tax-free. I'm real curious about this because it used to be Deals like this made sense. Shelf space mattered. Jamming more things into a truck that's heading to the store, that gives you scale, that gives you synergies, that was supposed to matter.
Recent history, including Kraft Heinz and some other deals we can get to, it's less settled science now whether that works. Maybe this is an opportunity to find out how much of what went wrong in other deals was the management execution compared to just the strategy.
uh the strategy could make sense mccormick and paper i think is better managed so i i am at least curious to see how this plays out to lose point thinking about like jamming stuff into trucks it it certainly there there is some sort of logic to what's going on here but i feel like m a activity in specifically in like consumer brands has been like that joke from the tv show arrested development it became like an internet meme or it's like well did it work out for them
Then they go, no. They delude themselves into thinking it will work, but it destroys value. But it could work for us. Every single time, I've been running through the mental Rolodex of consumer goods deals over the past decade, where you can say it was definitively a win for its investors. We mentioned Kraft Heinz. That was kind of a blunder.
The AB InBev buying SAB Miller to unite the beer world, that was not so great. Curring Dr. Pepper merger hasn't turned out too well, either. The jury's still out on this recent one with Kimberly Clark and Kenview. But I can't think of a major consumer brands deal where we're like, yep, really good stuff. Now, consumer brands is historically a defensive sector.
So the goal for some investors may be just collect a dividend, call it a day. It's fine. That's what a lot of investors want. But aside from that, this track record of value destruction at these major brands has to be like a red flag going into these sort of deals, don't you think?
My theory here is it's not the deals, it's the companies. The value of brands have been diminished over the course of the last 20 years or so. I kind of blame the internet, better flow of information, but who knows? But consumer goods to me today is a barbell. Most consumers will pay up for certain specific items, whether it's on holding shoes in any given moment or one just kind of splurge.
But otherwise, consumers are happy to buy generic. That's a nightmare for these mid-tier brands. And that's most of what we're talking about with Kimberly Clark, Kenview, Kraft, and Heinz. If that's the case, this is a bad move for McCormick. And honestly, I believe in enough that I personally try not to invest in brands in the middle.
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Chapter 5: Why did Eli Lilly acquire Centessa Pharmaceuticals for $7.8 billion?
And that's a problem for anyone selling these kind of wide distribution, but a little bit extra because it's a brand name sort of products.
There have been a few decent examples of deals like this that have worked. Performance Food Group, getting back to the Cisco situation, is one that looks really interesting. Ticker symbol is PFGC. Between 2019 and 2023, it acquired three of its major competitors, including Cheney Brothers, which is a big Cisco competitor.
A major reason was to add new consumer segments, which is one of the reasons Cisco is acquiring Restaurant Warehouse. The stock is up 160% since the start of 2019. I'd call that a pretty solid example and a pretty close parallel. But I completely see your point.
There is a lot that can go wrong with these types of acquisitions, especially when a company like Cisco is taking on $21 billion of new debt to make it happen.
Yeah, and just for keeping score, too, the deal between Unilever and McCormick is also going to be taking on a rather considerable portion of debt as well. Whatever happens with these, the question for the next couple of years is, how quickly can we get these debt levels back down to pay off and make these things worth their while? We will be watching that.
Then, after the break, we're going to look at another M&A deal, but completely unrelated industry.
The Pendolino Plus train rushed from the station. In the cabin, Mikko smiled at his new colleague. The atmosphere was like a new friendship, which was only filled with doubt. Was the name of the colleague the same as the one Mikko had been calling all the time? Thank you.
We're going to shift gears in the industries we're talking about. We're going to stick with M&A. Yesterday, Eli Lilly announced it was acquiring Centessa Pharmaceuticals. As the case with most biotech deals, it is contingent on Centessa meeting some milestones. Assuming Centessa hits them, the deal is worth approximately $7.8 billion. Now,
I'm going to leave it to you, Matt, to get into the details of what it does. Centessa is a clinical stage development company that's looking to treat narcolepsy. Why is Eli Lilly willing to fork over $7 billion for a company that doesn't really even have a commercial treatment yet?
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Chapter 6: How do recent FDA approval changes impact investing in pharmaceutical companies?
If that happens, the treatment could be worth several times what Lilly's paying for it. It's a big if, but that's the goal.
That's why Lilly's paying up for a company that doesn't have a commercial product yet. This is just a big part of how R&D works in the industry. Look, I've seen the estimates, it's almost $2 billion that Big Pharma spends to get just one drug into production. through clearance. If you can do closer to a sure thing for $7 or $8 billion, suddenly it doesn't look too bad.
In Lilly's case, too, this is a proactive move to make sure that this does not become a one-hit wonder or a one-product company. Right now, about 60% of Lilly's revenue comes from GLP-1s. If anything, given all of the trials they have for different treatments, trying to get other GLP treatments on label. That's likely to only go up from here.
The nature of pharma is all good things come to an end. You're constantly racing to stay ahead of a patent expiration cliff, investing in a prominent therapy outside of GLP-1s. That makes a lot of sense, assuming their scientists think that there is a there here. And I'm going to leave it to their scientists, not me, to say whether or not what they're buying really makes sense.
Apparently, they think so.
To that point, too, I'm not going to claim to be somebody who can read clinical trial data very well and say whether it's good or bad in the direction they're going. But as somebody who has invested in the space from time to time, there are some hard numbers that investors should think about when looking at clinical stage pharmaceutical companies.
It's something around 20% to 30% of drug candidates that start a phase two clinical trial end up actually getting all the way through trials and FDA approval. You want to think of it as almost like companies with lots of shots on goal in their development pipeline, because there's no far-growing conclusion that any of these, in particular, ones are going to make it through.
And as we mentioned, there are some kind of contingencies built into the deal that says, hey, you have to meet these milestones for us to actually pay out the number that we're saying. I want to shift gears a little bit, because talking about healthcare in general, I want to get your guys' thoughts, but I don't want to drift too far here.
One thing that's hard to shake when looking at the industry right now is FDA approvals. The rules and processes for getting approvals look pretty different in this current administration than in prior ones.
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Chapter 7: What are the long-term investment prospects for Whirlpool?
It's a guarantee it's going to happen whenever we do these mailbag sections. His question was, I want to get your perspective on the long-term investment thesis of Whirlpool. The ticker is WHR. I'm drawn to the generous dividend, but also question the sustainability of the dividend given its high debt load on the balance sheet.
I also want your opinion on the long-term narrative of the company given the international competitive environment in the large appliance sector. Thanks for the comments. Cheers. Matt, I want to start with you. Whirlpool, what is your take?
My short answer is, the market doesn't seem too convinced on the long-term thesis for Whirlpool either. The stock is down more than 50% from its high. It's still a profitable business. It has a 6.9% dividend yield, as we're recording this. It's well covered by its earnings. It trades for about 9.3X trailing 12-month earnings and less than 9X forward earnings. It has about $6.5 billion of debt.
I don't view that as an unreasonable debt load, especially because it steadily declined for the past three years. Now, management has made some questionable decisions recently, I will say that. They did a dilutive capital raise about a month ago. It caused the stock to drop 15%. That was a good portion of that decline I mentioned.
It's a solid business, a nice dividend stock to own, but it's not one to buy and forget.
I think I'm with the market on this one. The bull case is a recovering housing market plus continued tariffs boost sales. I think we're quite early in the recovery of housing, and I'm not sure what to think on tariffs. Dividend does look okay for now, but remember, they already cut it in half last year, so they are willing to make the hard decisions. They did just raise capital in February.
That makes things look better, but that speaks to a business that is not firing all cylinders. There's probably a trade to be done here, guys, because Matt's right, the business isn't going away, and there is probably a bottom to bounce off of, especially with actives involved.
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Chapter 8: What are the key takeaways from the listener mailbag questions?
But for me, I don't see this as an attractive long-term investment. The deck is stacked against them.
As a company that we can say is sensitive to the economic headwinds or tailwinds of the housing industry, whether that be new construction or refurbishment or anything like that, it's going to take a while for something like Whirlpool to really turn around. All you have to do is look at mortgage originations or refinancing originations to see that the housing market is in a very, very slow space.
And as long as that is kind of crawling along, it's hard to see Whirlpool making a really strong recovery. I think we're all in consensus here. There's probably a long-term narrative somewhere, but with the headwinds that the company is facing, maybe just sit on the sidewinds for a while.
As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only.
To see our full advertising disclosure, please check out our show notes. Thanks to our producer, Dan Boyd, and the rest of The Motley Fool team. From Matt, Lou, and myself, thanks for listening and we'll chat again soon.
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