Brexit may affect U.S. companies with euro exposure

by Jeff Gelski
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Brexit
The United Kingdom leaving the E.U. may impact such companies as Kellogg, General Mills and Kraft Heinz, according to Credit Suisse.

ZURICH, SWITZERLAND — U.S. packaged food stocks should hold up better than the broader market due to their inherent safe haven nature after the United Kingdom voted in favor of leaving the European Union, according to Credit Suisse. Within the sector, however, U.S. companies with the highest euro exposure may underperform the most.

Those companies include Mondelez International, Inc., The Kellogg Co., WhiteWave Foods, General Mills, Inc. and Kraft Heinz.

“These companies will have to cope with the probability of a recession in the U.K., the immediate prospects of higher raw material costs (due to transaction currency exposure), and higher tariffs across Europe,” Credit Suisse said. “We expect these companies to pass through these higher costs to consumers through pricing in the near to medium term.”

Brexit Chart
Europe exposure by company as % of sales

The implications are probably negative for agricultural companies such as Archer Daniels Midland Co. and Bunge because they prefer frictionless global trading environments, according to Credit Suisse.

“However, volatility in the global grain markets sometimes helps these companies in unexpected ways.” Credit Suisse said. “So we refrain from drawing any immediate conclusions.”

The United Kingdom’s vote to leave the E.U., called Brexit, may affect the plan of ConAgra Foods, Inc. to spin off its Lamb Weston business, too.

Brexit chart
Britain's leading food and drink manufacturers have given an overwhelming endorsement to the campaign for the U.K. to remain in the European Union.

“We may be jumping to conclusions, but if the financial uncertainties created by this referendum accelerate, ConAgra may decide to delay the i.p.o. of Lamb Weston,” Credit Suisse said. “But we don’t view this necessarily as a negative for the stock because ConAgra always has an option to re-engage Post, which has expressed a strong desire to buy the Lamb Weston business.” 

Brexit certainly will affect member companies in the Food and Drink Federation, which represents manufacturers in the United Kingdom.

Ian Wright, director general at the Food and Drink Federation
Ian Wright, director general at the Food and Drink Federation

“In March we released the results of a poll of our members, which showed 70% support for Britain to remain in the E.U.,” said Ian Wright, director general at the Food and Drink Federation. “It’s inevitable in the light of those results that the majority of F.D.F. members will regard this as a disappointing result for the food and drink industry.

“Now F.D.F. will work on behalf of our members and all those across our industry to find a way through this very challenging period that we face. We’ll focus on working with the government to understand what this means for trading, market access and regulation to secure the best outcome for British food and drink manufacturing business and their customers.”

David Thomson, chief executive officer of the Scottish Food and Drink Federation, pointed out a majority of the people in Scotland, which is part of the United Kingdom, voted to remain in the European Union.

David Thomson, chief executive officer of the Scottish Food and Drink Federation
David Thomson, c.e.o. of the Scottish Food and Drink Federation

“In Scotland it also raises the chances of there being a further referendum on independence,” he said. “This risks more uncertainty for the businesses in both Scotland and the rest of the U.K. S.F.D.F. will work to help the industry find a way through this very challenging period that we face.

“We’ll focus on working with the U.K. and Scottish governments to understand what this means for trading, market access and regulation to secure the best outcome for Scottish and British food and drink manufacturing businesses and their consumers.” 

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