Hormel’s $3.35B Planters purchase is an investment in more than just peanuts

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Hormel’s $3.35B Planters purchase is an investment in more than just peanuts


The Planters brand may be best known for peanuts, but for its new owner, Hormel Foods Corp.’s
HRL,
-0.27%

$3.35 billion purchase of the portfolio of products from Kraft Heinz Inc.
KHC,
-0.01%

is an investment in a growing snack lineup.

“[W]e identified the Planters brand in our 2016 strategic planning process as a brand that would fit well into our growing and evolving portfolio,” said James Snee, chief executive of Hormel, on a call after the announcement was made.

Read: Beyond Meat’s snack partnership with Pepsi is going to take a while to show results, analyst says

“However, it wasn’t until early 2020 that we engaged with Kraft Heinz on this process.”

Hormel’s portfolio of brands includes the namesake chili, bacon and other products, Spam and Dinty Moore.

Many of Hormel’s products contain meat, but with this purchase, now a quarter of sales will be non-meat items. Skippy and Justin’s nut butters are also owned by Hormel.

Moreover, the purchase is an investment in a growing snack category. In his remarks, Snee said that 70% of consumers snack more than twice per day. In addition to the Planters products, Hormel offers snack trays, salsa and guacamole, and meat-and-cheese plates.

The Planters brands that were acquired contributed $1.1 billion in sales to Kraft Heinz in fiscal 2020, primarily in the U.S. segment, according to Kraft. It includes Nut-rition products, Cheez Balls and, of course, peanuts.

However, peanuts make up less than one-third (29%) sales, the same amount as cashews. For Hormel, Planters is a platform for greater innovation. And snacking is more than just something to do alone at a desk when the 3pm munchies hit.

And: Impossible Foods cuts prices 20%, and Beyond Meat shares are dropping

“The business comes with numerous items designed for individual consumption with products such as on-the-go packs, pop-and-pour jars, snack mixes, trail mix, Corn Nuts and many other products,” said Snee.

“This acquisition also gives us further scale in social snacking occasions with product formats such as larger canisters and jars of peanuts, cashews, mixed nuts pistachios, almonds, pecans, snack mixes, Cheez Balls and other products.”

JPMorgan analysts say the acquisition makes “strategic sense” for Hormel. Moreover, the company expects accretion of 17 cents per share to 20 cents per share by fiscal 2022.

However, analysts think the costs could go beyond the price tag.

“[T]here is an opportunity cost to consider, since Hormel’s acquisition of a low-growth nuts business limits its ability for at least the next couple of years to pursue larger-scale businesses that might be more accretive to its growth rate,” analysts said.

JPMorgan rates Hormel shares underweight, and raised its price target by $1 to $41.

For Kraft, the deal is part of a transformation that the company is undergoing and will discuss further at the Consumer Analyst Group of New York (CAGNY) event next week.

“We’re renovating more than 40% of our portfolio,” Carlos Abrams-Rivera, U.S. Zone president at Kraft Heinz, told MarketWatch. He says the strategy is based on what they’re hearing from shoppers.

See: ‘New normal’ grows more likely as vaccine acceptance, stimulus spending increase: Stifel data

“We’re changing the way we show up in the everyday lives of consumers,” he said.

Kraft reported fourth-quarter earnings and sales that beat expectations and announced a quarterly dividend. Kraft is also focused on snacks, but with products like ketchup, mayonnaise, Ore-Ida potatoes and Classico sauces, the company is also looking to ways it can enhance consumer meals, many of which are now being eaten at home due to COVID-19.

Kraft is also focused on creating a portfolio with less exposure to private-label encroachment.

“Planters is one of the brands that is most affected by private label in our portfolio,” said Miguel Patricio, chief executive of Kraft Heinz, on the earnings call, according to FactSet.

“And so when we looked at that, in order to have more flexibility towards the future on building a portfolio, I think that we made that choice and we’re very happy with that.”

Don’t miss: ‘Chipotlanes’? Chipotle CFO says the idea of drive-through service was controversial at first

Going forward, even with more coronavirus vaccinations happening and moves towards economic normalcy, Abrams-Rivera thinks the emotional connection to at-home dining will persist.

Kraft has an away-from-home business as well, for instance, in the ketchup and other condiments that diners see at restaurant chains, stadiums and concert halls. But life has changed in ways that eating at home will be more of the norm.

“If you look at how people are going to work going forward, my sense is there is not going to be the same level of people going back to the office five days per week,” he told MarketWatch. “There will be more occasions to eat at home.”

Hormel stock has edged up 0.6% over the past year. Kraft is up 18.4% for the period. And the benchmark S&P 500 index
SPX,
+0.08%

has gained 16.1% for the period.



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