Will Somebody Eat Big G?

One day when I was nine or ten my mom had me empty out my savings account and use the money to buy stock in General Mills – where my dad was a senior executive.  It was the first security I ever owned, and started my lifelong fascination with the stock market.  Every day after that, Dad would get home from work and I would ask him how the stock had done that day.  If it was down, I’d jokingly tell him to go back to work – he never thought that was funny.

One day after our usual conversation he added, “Just wait until tomorrow!”  Despite my begging, he didn’t say anything.  I knew he had been traveling a lot (even more than normal), but I didn’t know what that meant.  The next day, General Mills announced a new joint venture with Nestle called Cereal Partners Worldwide (CPW).  The stock had a nice rally that day, and I couldn’t wait for Dad to get home to congratulate him.  I didn’t understand much of it, but basically the CPW deal was a series of agreements.  What got all the press was the combination of products, marketing, and distribution between the two companies to sell cereal worldwide.  What Dad was just as thrilled about was the “standstill agreement.”

Part of their agreement with Nestle was a “standstill” where Nestle wouldn’t even offer to acquire General Mills.  Also, it was widely understood that Nestle would be a white knight for General Mills if somebody else tried to take over the company.  In essence, General Mills would stay independent.  This agreement went in perpetuity, or until 10 years after CPW was disbanded (it’s still going strong).  I was too young and naive to understand the emotion on Dad’s face, but looking back it was relief.  He no longer had to worry about corporate raiders or losing his job because of them.

I thought about that day again today with the news that Mondelez is offering to buy Hershey.  Consumer staples stocks are all rallying today – General Mills now has a market cap of over $42 Billion and trades at a PE ratio of almost 22x earnings estimates for the year ending in 2018!  To me, the price seems rich even for a company that I love.  I wonder what is driving it up, and I hope it’s not takeover speculation.  Occasionally, I read articles suggesting that 3G and Buffett buy General Mills, or that Nestle should finally just buy General Mills.

They don’t know about the standstill.


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