One of my favorite topics (and targets for criticism) for quite some time have been consumer companies. Especially those with a seemingly defensive business model that in the past offered stability in times of market stress. This recipe does not seem to work anymore, though. First and foremost, food companies have experienced an unprecedented bear market that caught many risk-averse investors on the wrong foot. When stocks have fallen significantly, takeover interest arises. Is this a sign that shares of consumer staples have fallen enough?

Summary and key takeaways from today’s Weekly
– M&A activity in the consumer sector seems to be turning up.
– Two big deals are in the making, with one already announced.
– However, none of the existing problems get solved — for me, it smells like desperate empire building and selling hopium to shareholders.

Every investor wants to buy cheap stocks.

As if it were that easy.

Buying low and selling high is the ultimate goal, but unfortunately also the unmastered art of investing for most. Of course, cheap or expensive are highly subjective attributes. Sometimes it can already be enough not to buy too expensive stocks of companies that are facing strong headwinds.

Winning by not losing. Or by not doing stupid things.

Often mistaken for cheap, however, are shares of companies that have fallen noticeably. Seasoned investors know that the fact that a stock has just fallen, does not automatically make it attractive, entirely ignoring fundamentals. More often than not the market is right as it anticipates certain developments and prices them in. In this case, a growth slowdown or even a flip to shrinkage and margin erosion.

Despite “safe demand”, “strong brands”, and “proven dividend histories”. The typical investing mindset — investing (I prefer to say buying and hoping) based on past performance.

Little surprisingly, lofty valuation multiples start to deflate.

In the case of food companies, it seems that what supposedly began as a correction, has developed into a brutal bear market with no end in sight. I have written about it extensively when these shares traded significantly higher, warning attentive Financial-Engineering readers to be cautious.

Dividend yields climbed from 2% to 3%, 4%, 5%, and more. Every dip was another great buying occasion — or so they said. Ignoring fundamental shifts, however, has turned into a costly mistake of garbage hunting instead of the aimed for value investing.

Recently, M&A activity in the sector has started to turn up. Is this now a sign that consumer stocks might finally be cheap enough?

I am going to kick off this topic, expecting more deals to be announced.

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Minus and Minus equals Plus?

We were taught in school that multiplying two negative figures equals a positive one.

In the case of investing, concretely merging two sick entities and using plenty of debt, however, I have serious doubts that this is the solution to the underlying issues.

I just say Kraft-Heinz (ISIN: US5007541064, ticker: KHC) and you instantly know what I mean.

But before we jump into merger news that triggered me to write this weekly, I wanted to briefly repeat what there core problem with consumer stocks has been all along, and why these companies have such issues, when in the past they have been fortresses and cornerstones of risk-averse stock portfolios.

This isn’t new — but it is essential to understand to not pick the rotten apple.

Among my main points of criticism was a changed consumer behavior.

While some see a shift to healthier eating habits — like for example empty shelf spaces where Skyr usually stands might suggest — the reality in my view is more that branded offerings simply have become too expensive at the wrong time.

The companies have overdone it with pricing.

Their motivation was obviously to pass on higher costs to the consumer to protect their margins and bottom lines. Unfortunately, they overestimated the power of their brands. Sales volumes started and continue to suffer, causing headaches for executives as less units increase production costs, forcing them to hike prices even more — if they want to avoid pricing wars.

Simply put, most brands are not strong enough and replaceable.

This short article from a WSJ email newsletter wrote what I have been pointing towards all along. While I did not use such fancy terms like “K shaped economy”, the core was the same.

Those who can afford it, don’t care. But the majority does care.

The switch to private-label brands cannot be hidden anymore. Companies, once famous for their resilience, have turned into seriously troubled zombies. Their balance sheets carry likely-inflated assets while debt levels are clearly too high in light of shrinking businesses and higher costs of debt (see my weekly here).

From the same email, the following chart shows how over 50 years, five decades, or roughly two generations, the income structure has changed. Lower-income earners have increased and high-earners have increased even more. But the most important part, the one that supports the economy, the middle class, has shrunk noticeably.

And this chart only reaches until 2023. The reality might be more dire today after waves of corporate layoffs have been announced.

When the key target group collapses, also negatively boosted by declining birth rates (see here), these companies have effectively lost big parts of the business. And nothing points towards a change in trend. Nothing.

The lower class is out of reach financially.

The upper class, despite having grown, will not suddenly start eating twice as much.

The attractive mass market is under attack.

Corporate leaders have the choice between continuing to bleed or trying to regain market share through aggressive promotions, sacrificing margins and bottom lines. And maybe the holy dividends. None of these choices seem to be lucrative in my view.

These stocks are easy passes as long as their underlying issues are not solved — including the wracked balance sheets.

The charts are telling you all you need to know.

Long-time readers know that it is foolish to try to spot buying opportunities just by looking at the charts and the seemingly low PE ratios. Even worse, comparing today’s PE ratios to the former peaks when these companies were able to post growth.

How does that make any sense?

Both tell you nothing — NOTHING — about the balance sheets, weak assets and high debt loads, and nothing about how the businesses are doing. Shrinking businesses with falling demand often have low PE ratios.

It’s not the market who is stupid by “not seeing the value”.

And even if, PE ratios of 10–11x are still too high. They should have PE ratios of 6x or so to have priced in enough margin of safety. Including debt, valuations are still extremely high — important: for what these companies offer.

This all takes into account that margins do NOT fall. The PE ratios are based on the currently often still-high margins. What if these companies suddenly enter pricing wars and margins collapse? Today’s PE ratio of 10x then suddenly turns into 15x or even 20x — before debt is taken into account.

Which leads us to our core topic of today.

Is this another Kraft-Heinz in the making?

McCormick (ISIN: US5797802064, ticker: MKC), the leading spice company, was rumored to be seeking the next major deal. Concretely, with Unilever’s (ISIN: GB00BVZK7T90, ticker: ULVR) food division, known for brands like Knorr or Hellmann’s. Not too long ago, Unilever spun-off its ice-cream division (see here). With this, it would entirely get rid of its food offerings. At least on the surface.

The rationale reads like another round of BS-bingo. You know, reaching more consumers, cost savings, efficiencies, a new global giant, creating shareholder value, bla bla bla.

Does multiplying problems solve any?

Factually, McCormick stock has fallen sharply, like is the case with most food companies. For all the same reasons — growth concerns, cost pressures, high debt, etc.

On 31 March 2026, the following news hit the ticker.

Instead of celebrating a new champion, the market seems to be much more cautious and less enthusiastic about this deal.

Unilever dropped 7% in London on the same day, followed by another 1–2% the next day.

McCormick?

Well…

The trends and drivers in the sector are well known.

What is also known is that such mega deals make bold headlines, but seldom create value for shareholders. What follows instead are costly restructurings, huge debt loads, massively inflated balance sheets, and in the worst case asset write-downs.

With inflation on the rise, it is highly questionable cost-cutting and efficiency measures will be delivered as sold to shareholders.

The risk for overpaying and destroying shareholder value is very real.

I am not the only one skeptical about this move.

But let’s have a closer look.

For executives, this is all rosy, of course.

If and after the deal closes, the new Unilever will own 65% of the combined entity of McCormick + Unilever’s food unit. So effectively, it does not get entirely rid of it, but it gives up the steering wheel, while remaining the controlling shareholder.

On top, Unilever will receive 15.7 billion USD in cash.

For Unilever shareholders, it looks even reasonable at this point.

Not so for McCormick owners — who were enriched by a spicy +0.85% (in total) over the last ten years.

Yes, the dividend… I don’t care.

Technically, McCormick will acquire Unilever’s food division through a cash and equity mix. Cash was mentioned above.

The remaining part to close the gap — around 13.4 billion USD in equity for a total deal value of 29.1 billion USD — raises some eyebrows.

Attentive readers have seen above that McCormick has a market cap of 14.4 billion USD. After the negative reaction to the news, it’s 13.5 billion USD.

In other words, MKC will double its share count while equity values are low.

The first step in the wrong direction — massive shareholder dilution. Fully understandable that the reaction was negative.

To fund the cash part, MKC will take on massive debt, as they only have 177 million USD on the balance sheet per last count, fresh from yesterday’s earnings release. On top, they have plenty of intangible assets and 4.9 billion USD of existing financial debt.

So, fragile assets and more debt to come.

But how has MKC developed over the long-term?

The top line has been slowly crawling up, which looks okay at first sight.

Unfortunately, gross margins have been on the decline.

Operating margins dropped after inflation hit, and have been recovering somewhat since. But they haven’t fully regained the previous highs.

Cash flow has been stagnating, definitely not rising, for more than six years now.

Here on a per-share basis, after some modest dilution.

Growth concerns are real.

All in all, I do not see the path for value creation. If at all, it could be a good move for Unilever as it becomes a leaner, more agile entity. And it receives a massive cash component. I hope they use it wisely instead of paying a special dividend.

We will see.

A few days before, another favorite of mine made big headlines — the alcohol sector.

Unlike the McCormick-Unilever tie-up, this deal has not left the negotiation stage for now. But if the merger comes — will it solve any underlying core issues?

I have serious doubts.

Where I do not have any doubts are highly-dilutive equity issuances and increased debt loads. This is practically safe, as both do not have enough cash, far from it, to finance the deal.

That’s why I cannot celebrate such mergers.

To the contrary, for me they are big red flags and warning signs of empire building and megalomania. The obvious winners are not shareholders but investment banks and executives who receive salary raises for steering much bigger companies.

Prove me wrong, but such deals do not show any reason to be optimistic. I think we will see more such announcements, given that many consumer stocks have fallen massively (which as said does not make them automatically cheap or attractive).

That’s why I stick to what’s working, not stuttering.

Conclusion

M&A activity in the consumer sector seems to be turning up.

Two big deals are in the making, with one already announced.

However, none of the existing problems get solved — for me, it smells like desperate empire building and selling hopium to shareholders.

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