Sector News

Hormel to Buy Organic Meat Maker for $775 million

May 27, 2015
Food & Drink
Hormel Foods Corp. agreed to buy Applegate Farms LLC for about $775 million, a move that would give the maker of Spam a foothold in the organic-meats category.
 
The purchase, Hormel’s largest ever acquisition, is the latest in a wave of buying by established food companies involving brands advertising simpler, more natural ingredients. The deal would help Hormel appeal to growing numbers of U.S. consumers seeking deli meats, hot dogs and other products produced from animals that received no antibiotics or growth hormones and were fed a 100% vegetarian diet.
 
Closely held Applegate, founded in the late 1980s, is expected to generate sales of about $340 million this year, and it has been growing at a double-digit rate in percentage terms, Hormel officials said on Tuesday.
 
Owning Applegate—the top seller in the natural and organic processed, prepared-meats segment—would enable Hormel to appeal to younger consumers and others who increasingly prefer natural and organic meats, Hormel Chief Executive Jeffrey Ettinger said in an interview. “The interest in natural and organic foods, to us, it’s a movement, not a fad,” he said.
 
Other big food companies tapping into the trend recently include General Mills Inc.—which last year paid $820 million for Annie’s Inc., a maker of organic macaroni and cheese and bunny-shaped cheddar snacks—and Campbell Soup Co., which acquired juice maker Bolthouse Farms in 2012.
 
The Applegate acquisition also reflects moves by food companies to bulk up in the protein category as Americans move to more protein-heavy diets and eschew carbohydrates. In 2014, Tyson Foods Inc. paid $7.7 billion for Hillshire Brands Co., the maker of Jimmy Dean sausages and Ball Park hot dogs, and Post Holdings Inc. bought egg and dairy-goods company Michael Foods Group Inc.
 
Hormel, which also makes Jennie-O turkey burgers and Dinty Moore stew, has been diversifying its portfolio to capitalize on growing protein demand and higher-margin foods. The company last year paid $450 million for CytoSport Holdings Inc., maker of Muscle Milk-brand protein shakes and powders, and in 2013 it acquired the Skippy peanut butter brand from Unilever PLC for about $700 million.
 
Applegate plugs a potential competitive weakness for Hormel. Hormel mainly sells conventional meat products, in which suppliers use antibiotics for disease prevention and treatment. Rivals including Tyson and Pilgrim’s Pride Corp. have recently increased sales of antibiotic-free meats and pledged to make those products a far-bigger part of their businesses in the long term.
 
Applegate, based in New Jersey, sells deli meats, cheeses, frozen burgers and breaded chicken at retailers with a heavy emphasis on organic foods, including Trader Joe’s and Whole Foods Market Inc., as well as conventional supermarkets.
 
Applegate doesn’t have its own meat-processing facilities. It buys meat from about 1,800 family farms and relies on contract manufacturers and processors to produce its packaged products. The company has long sourced meat from farmers that eschew antibiotics.
 
An acquisition by Hormel could create challenges for the Applegate brand if some loyal customers are bothered by its affiliation with the maker of Spam, a highly processed meat product. Some consumers of organic-meat products actively try to avoid brands associated with big meatpackers.
 
Stephen McDonnell, Applegate’s founder and longtime CEO, said in a news release that it has long been his mission to “change the way we think about meat,” and the deal with Hormel “is definitely a continuation of that mission.”
 
Austin, Minn.-based Hormel said that the deal would allow it to improve its supply chain for natural and organic products and that it “provides a faster path” to expand offerings in a high-growth category.
 
“We have long felt that this is a very attractive space, and we certainly explored ways to potentially get into it ourselves,” Mr. Ettinger said. “But clearly the Applegate team had a 25-year head start and a tremendous expertise and reputation in this space that would be very difficult to match.”
 
The deal is expected to close within 60 days. Applegate would operate autonomously as a stand-alone subsidiary in Hormel’s refrigerated-foods segment, Hormel said.
 
Hormel said it expected the deal to be neutral to its per-share earnings in the current fiscal year, which ends in October, but to add seven cents to eight cents to per-share earnings in the following year. Analysts, on average, were expecting per-share earnings of $2.53 in 2015 and $2.72 in 2016.
 
Shares of Hormel, up 21% over the past 12 months, rose 3.4% to $58.52 in after-hours trading.
 
By David Kesmodel
 

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