Grand Met pays $2.6bn for US sauce and soup group

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Grand Metropolitan, the food and drinks group chaired by Lord Sheppard, surprised the stock market yesterday when it announced the $2.6bn (£1.7bn) purchase of Pet Inc, an American food company specialising in Mexican sauces and Italian soups.

The announcement came just weeks after Lord Sheppard said that Grand Met was only looking for small, "add-on" acquisitions. Lord Sheppard had also said there would be no "major restructurings". The Pet deal will necessitate a £120m provision to cover redundancy and restructuring costs. Grand Met's shares fell 26.5p to 378p on the news.

Under the terms of the deal, Grand Met is paying $26 per share for a company whose shares were trading at around $17 in early December. Pet's share price had drifted upwards to $20 on speculation that a deal was imminent. Analysts said the deal made strategic sense and that, while it was "not cheap", it was in line with other deals involving US food companies.

Gerald Corbett, Grand Met's finance director, said Pet's advisers contacted Grand Met on 9 December, after Lord Sheppard made his comments. "The market had overreacted because it thinks the deal is a surprise," Mr Corbett said. "But we are managers and when a good opportunity comes along it would be inappropriate not to take it just because it might surprise one or two people."

Pet is based in St Louis, Missouri. Its principal brands are the Old El Paso range of Mexican foods and Progresso, a range of ready-to-serve soups. Other products include Downyflake frozen waffles and Pet-Ritz frozen pie crust cases.

Grand Met is financing the deal via a $600m tender offer, which will be launched tomorrow. The remainder will be funded from the company's existing banking arrangements.

Grand Met says the deal marks a further step in its strategy of developing a portfolio of leading food and drinks brands with potential for significant growth. The deal makes Grand Met the seventh-largest food company in the US (up from 14th) ahead of Kellogg and Heinz. It will be conducted through its Pillsbury subsidiary, which Grand Met acquired in 1989.

Grand Met said Pillsbury was performing well and now had sufficient infrastructure to cope with an acquisition of this size. David Nash, chairman and chief executive of Grand Met's food sector, said the group's strategy was to build a portfolio of billion-dollar brands. The group already has Green Giant, Pillsbury and Haagen-Dazs, the upmarket ice cream whose sales are now over $800m.

Sales of Old El Paso and Progresso are both currently around $350m but Grand Met estimates it can build both to billion-dollar status by improving marketing and focusing more attention on international markets.

The Old El Peso range, which is sold in distinctive bright yellow packaging, is available in the UK but Grand Met hopes to expand sales here. In the US, Mexican food and sauces are a high growth area. Over the last five years, the market has been growingby an average of 11 per cent a year, with Mexican sauces growing at 15.8 per cent.

Salsa, one of the main Mexican sauces, overtook ketchup as the most popular sauce in the US last year. "There is a bottle of ketchup on the table of every American diner. We aim to put a bottle of salsa there too," Paul Walsh, Pillsbury's chief executive, said yesterday.

The cost of integrating Pet into the Pillsbury business will be £120m, which will include some redundancies, plant and office rationalisations and systems integrations. Disposal of some underperforming brands is expected but Grand Met declined to commentfurther.

The deal follows the acquisition of Pace, another Mexican foods group, by Campbell Foods last November.