The year was 1994, long before my time in the markets (and just before I started primary school). Quaker Oats acquired Snapple for $1.7bn, a decent-sized deal by today’s standards and undoubtedly a monster back then. Quaker was growing beyond its core cereals business, with beverages seen as a lucrative area. The deal rationale was based on category expansion and diversification. Keep those concepts in mind — you’ll need them later.
Drunk on success from Gatorade, Quaker’s management believed that it could apply the same playbook to other businesses. It’s the classic “We’ve seen this movie” approach that has been the root cause of so many terrible corporate decisions.
Quaker did a spectacular job of destroying what made Snapple a success in the first place. It tried to force-fit its corporate culture, completely ruining the endearing brand story that made Snapple a hit with customers. The loss of brand identity was accompanied by changes to the distribution model and package sizes. Hindsight is always perfect, of course, but it really made no sense to acquire a successful product and then change almost everything about it.
Just over two years later, Quaker sold Snapple for $300m, or less than a fifth of what it had paid. Incredibly, Triarc Beverages (which bought Snapple from Quaker) went on to pocket $910m when it sold Snapple to Cadbury Schweppes in 2000. That three-times return in the space of just a few years was achieved by reversing most of what Quaker did to break the business, thereby restoring Snapple to its former glory.
Clearly, it’s possible to make a lot of money from mergers & acquisitions (M&A). But the route to success usually lies in paying the right price in the first place — the old adage in the market is that you make your money on the way in to a deal, not on the way out.
Even Warren Buffett isn’t immune to these risks. The 2015 Kraft Heinz merger is widely regarded as one of his worst deals. In an interview with CNBC in 2019, Buffett acknowledged that Berkshire Hathaway overpaid for Kraft and that it had been wrong about the merger, with the underlying products having less pricing power than expected.
To be fair, there were many reasons Kraft Heinz was a mess. The integration came during a period of shifting consumer trends and a focus on private label at retailers, proving once more that distribution is a wider moat than having a brand — just ask Nike how its preference for brand over distribution turned out. There were other problems as well, including deep cost-cutting that led to terrible underinvestment in the business. Of course, the cost-cutting probably only happened because Berkshire Hathaway was trying desperately to justify the deal value.
Even Warren Buffett isn’t immune to these risks. The 2015 Kraft Heinz merger is widely regarded as one of his worst deals
The point isn’t that all deals in the sector are bad. For example, in the 1960s PepsiCo acquired Frito-Lay and built the successful mix of drinks and snacks that underpins the group today. Bidcorp is a stunning JSE-listed example of how bolt-on acquisitions can be used to grow. The same is true for CA&S Holdings, which sits further up the value chain in the fast-moving consumer goods (FMCG) space. If all M&A transactions failed, nobody would ever do any deals.
But history has taught us to be cautious when FMCG groups do transactions with a rationale based on little more than category expansion and a plan to unlock synergies. The Premier-RFG Holdings deal is the latest example in South Africa, with Premier looking to merge with a business that has a completely different product range. Premier is focused on consumer basics such as bread, wheat and sugar, while RFG has been built around such categories as fruit and pies. For Premier to win in such price-sensitive categories, it has to be as efficient as possible. For RFG to win, it has to maintain brand strength and innovate on taste while navigating exogenous factors such as global deciduous fruit prices. Do these things sound like a natural fit to you?
Capitalworks invested in RFG in 2012 as part of a management buyout and brought it back to market in 2014. Eleven years later, it must be only too happy to roll its 44.5% stake into the enlarged group, as the private equity industry is all about catalysing returns and doing the next deal. Speaking of private equity, it doesn’t make me feel any better about the deal that Premier is from the Brait stable, where the dealmaking track record is as spotty as a litter of dalmatians.
I hope it works out for all involved. I’m just not blind to history.
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