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Food companies have gone on an epic binge – and there's no sign it will slow down any time soon.

A combination of low interest rates and limited opportunities for organic growth is convincing many calorie producers that the only way to expand is by gobbling up the opposition. As they do so, prices for acquisitions are soaring.

On Sunday, Tyson Foods Inc. demonstrated the new exuberance in the industry when it agreed to pay $7.7-billion (U.S.) for sausage maker Hillshire Brands. The deal put an exclamation mark on a year and a half that has seen China's Shuanghui International Holdings buy pork processor Smithfield Foods Inc. for $4.7-billion, restaurant supplier Sysco Corp. take over rival US Foods for $3.5-billion and Warren Buffett and partners acquire H.J. Heinz Co. for $23.5-billion.

Tyson's stock price dropped immediately after the announcement of the deal, suggesting that investors think the Arkansas-based company overpaid. The skeptics have good reason to be nervous. Tyson is paying more than 30 times earnings for its new acquisition, and its offer is a 70-per-cent premium to what Hillshire was trading at before the bidding began.

But it's possible to see why the deal would appeal to Tyson management. The acquisition, while priced at lofty levels, offers a way to buy growth in an industry where expansion opportunities are limited.

According to Tyson CEO Donnie Smith, brands like Hillshire's Jimmy Dean sausages and Ball Park hot dogs don't come along that often and will be a perfect complement to Tyson's own strengths in chicken processing. Plus, he sees room for saving about $300-million a year once the merger is complete.

Similar logic is being heard in the boardrooms of many food companies as managers look for ways to bulk up but remain focused. In recent months, Mondelez International Inc. merged its coffee business with that of DE Master Blenders 1753 to create what the firm bills as "the world's largest pure play coffee company," while Del Monte Pacific, a fruit juice maker based in Singapore, bought the unrelated Del Monte Foods for $1.7-billion as a way to expand its U.S. presence. Meanwhile, Saputo Inc., the Canadian cheese maker, purchased Warrnambool, an Australian dairy, for $538-million Australian ($548-million) – a staggeringly high price, by some people's reckoning – to gain a foothold in the Pacific Rim market.

In many cases, these deals give the enlarged businesses more bargaining clout with supermarkets, which are increasingly focusing their limited shelf space on a few winners. In some cases, the companies may also be eyeing China's rapidly growing middle class and see size as a way to ensure they have the heft to play in that market.

Ultimately, though, the acquisitions reflect the magic power of low interest rates. A mature, slow growth food company would hold limited appeal for an acquirer if borrowing costs were considerably higher than they are now because the expense of financing the takeover would be prohibitive.

In an environment of low rates, however, a company with an established brand name that can generate a dependable stream of earnings becomes an attractive target for an acquirer who knows it can use those earnings to service a mountain of debt.

Especially if you believe that low rates will be with us for several years, the logic is compelling. Managers know that if they don't use their leverage to acquire a competitor, a competitor may acquire them – and clean house in the process.

Given the desire of most management teams to remain in place, the food sector is likely to see many more acquisitions before the current hunger for growth is finally sated.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
D-N
Dominion Energy Inc
+1.38%49.19
MDLZ-Q
Mondelez Intl Inc
-0.14%70
PPC-Q
Pilgrim's Pride
-0.78%34.32
SAP-T
Saputo Inc
+0.38%26.65
SYY-N
Sysco Corp
-0.93%81.18
TSN-N
Tyson Foods
-0.14%58.73
Z-Q
Zillow Group Cl C
-3.18%48.78
ZG-Q
Zillow Grp Inc Cl A
-3.53%47.86

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