In Mars megadeal, Big Food wants to get bigger

Mars’s nearly $30 billion deal for Kellanova would push the company, known for M & M’s and Snickers, into supermarkets’ chips and cracker aisles, handing Mars a larger share of a growing global snacks business.

The agreement, one of the biggest on record among food makers, comes as consumers are balking at higher grocery prices and scrutiny is growing over the potential health impacts from processed food.

Conditions are ripe for a fresh wave of consolidation as food companies’ sales growth slows and their stock-market valuations are depressed, according to Wall Street analysts and consultants. Pandemic-era pantry stocking and sharp price increases that continued in its aftermath fueled a sales boom for food companies. That growth has cooled, prompting executives to search for new ways to boost their businesses and cut expenses.

“Everybody’s kind of getting their mojo back, but looking for growth," Kellanova Chief Executive Steve Cahillane said in an interview Wednesday.

Smaller food deals are already under way. Soup-and-snack giant Campbell Soup this year purchased Sovos Brands, the owner of Rao’s pasta sauce, for $2.7 billion. J.M. Smucker paid $4.6 billion for Twinkie-maker Hostess Brands.

In recent months Kraft Heinz has been evaluating a potential sale of hot dog and bacon brand Oscar Mayer, The Wall Street Journal has reported. Food-industry analysts have said companies like potato-chip supplier Utz, as well as Simply Good Foods and BellRing Brands, are other possible takeover targets.

“Any board member of a consumer packaged-goods company who is watching Kellanova-Mars play out would have to assess whether that could be a path for their future," said Robert Moskow, a TD Cowen analyst.

Mars’s mission for snacks

One of the largest closely held companies in the U.S., Mars has long leaned on deals for growth. Beyond candy, the family-owned company sells goods from Wrigley’s gum to Ben’s Original rice, and is one of the world’s largest purveyors of dog food and other pet-care products.

Since 2020, Mars has scooped up snack-bar maker Kind’s North America business, Nature’s Bakery and Trü Frü, which makes chocolate-coated fruit snacks—all part of a broader effort to expand in snacks.

In January, Mars opened a $42 million research-and-development facility in Chicago dedicated to snacks. A tour through the 44,000 square-foot facility revealed a nut kitchen, where employees test and process peanuts (undesirable flavor notes include “cardboard"), and rooms where thousands of M & M’s “lentils" tumble in giant, dryer-like machines to get their candy shell.

CEO Poul Weihrauch said in an interview that Mars had been studying Kellanova for a while. Then, months ago, he picked up the phone and asked Kellanova’s Cahillane to meet over coffee in Chicago, where the two discussed a deal.

Many of Mars’s recent acquisitions have focused on foods perceived as healthier, though Weihrauch said Wednesday that Mars was drawn to Kellanova’s broad portfolio. He said brands like NutriGrain and RX Bar fit well into Mars’s plan to boost its healthy offerings. At the same time, Weihrauch said he is a big fan of sour-cream-and-onion-flavored Pringles, sold in telltale green canisters in grocery aisles.

“I don’t need to read the label, I just go and take it on autopilot," Weihrauch said.

Spending diet

Food giants including Kellanova have been battling lower sales volumes as consumers pull back on grocery purchases after multiple rounds of price hikes. From Kraft Heinz to Mondelez, companies are raising prices at a slower pace, rolling out more discounts and launching new products as they try to win back disaffected consumers.

Mars is privately held and doesn’t report its financial results. Kellanova—created from the 2023 breakup of Kellogg—said this month that its overall sales volumes fell 4% in its most recent quarter, though higher prices helped boost comparable sales. The company said sales volumes are improving in regions including North America, and raised its annual financial guidance.

The $214 billion U.S. snacks business has come under pressure in recent months. So far this year, snack sales are down 1% by volume compared with the same period in 2023, while overall food and beverage sales are up, according to Circana Group. In salty snacks, a slowdown that began with low-income consumers has spread to middle-income consumers, according to J.P. Morgan analysts.

Still, food analysts and consultants said Americans’ penchant for snacks isn’t going anywhere long term, as consumers eat fewer sit-down meals. “Year after year it hasn’t changed," said Randy Burt, a managing director at consulting firm AlixPartners.

Acquiring Kellanova would help Mars expand from sweet into salty snacks, broadening its offerings at a time when soaring cocoa prices have vexed candy makers and many consumers are working to cut back on sugar.

Cahillane said Kellanova’s snacks remain in high demand: “We are selling every can of Pringles that we can make," he said.

Driving deals

Financial pressures combined with low stock-market valuations have helped fuel past food-industry megamergers, Moskow said. In a flurry of deals around 2000, General Mills acquired Pillsbury Co., while Kraft Foods-owner Philip Morris bought cookie-and-cracker maker Nabisco Holdings. Kellogg also purchased Keebler Foods, and Conagra acquired Chef Boyardee-owner International Home Foods.

Big takeover targets are limited today. Excluding Kellanova, just six U.S. public packaged- food companies are valued at more than $20 billion, according to J.P. Morgan analysts. Some large food makers such as Hershey and Mars have trusts or family members with sizable controlling shares, which can complicate deals.

An S&P subindex of packaged food and meat company stocks has fallen roughly 4% over the past 12 months, while the broader S&P 500 has gained about 22%.

Food companies have reduced debt in recent years, making it easier to do deals, and analysts said supermarket chains’ growing power is adding incentive for food makers to get bigger, with greater scale offering more leverage in a longtime tug of war with grocers.

Kellanova said Wednesday that it would pay $83.50 a share for Kellanova in an all-cash deal, confirming an earlier report from the Journal. Shares in Kellanova rose nearly 8% to $80.23 in regular trading.

The companies said they aim to have the deal completed in roughly one year, though regulators have taken a tougher stance on some merger deals. Mars agreed to pay Kellanova a $1.25 billion breakup fee if the deal should collapse.

Lauren Thomas contributed to this article.

Write to Jesse Newman at jesse.newman@wsj.com