The Austin, Minnesota-based food company Hormel Foods Corp has entered into a definitive agreement to buy the nuts business of Kraft Heinz in a cash transaction of $3.35 billion, marking the largest acquisition by Hormel in its vast 130-year history.
Sale By Kraft Heinz
Under the deal, Hormel will receive most products under the Planters brand, including mixed nuts, trail mix, Cheez Balls, Cheez Curls, and Nut-rition products along with the Corn Nuts brand. Intellectual property rights to the two brands will also be granted subject to existing third-party licenses in other countries. Last year, the nuts business achieved $1.1 billion in revenue for Kraft Heinz.
Moreover, Kraft Heinz will also sell its Corn Nuts production facility in Fresno, California, along with the Planters production facilities in Fort Smith, Arkansas, and Suffolk, Virginia. The facilities will continue to operate as regular with their employees.
From Kraft To Kraft Heinz
Kraft Heinz was the result of the notorious merger between Kraft and Heinz that took place in 2015. The investment firm 3G Capital and Warren Buffet-led Berkshire Hathaway decided to first acquire Heinz and then merge it with Kraft. At first, the move earned much praise from Wall Street, however, it was short-lived.
Post the merger, Kraft Heinz worked on reducing costs, following a strict approach to financial growth known as zero-base budgeting which turned the packaged food industry upside down. However, 3G Capital, who proposed the model, realized soon that it wasn’t working for the food industry.
Wall Street lost confidence in the company’s approach, investigating the long-term viability. The combined company has struggled to keep up with changing consumer tastes and is perceived to have underinvested in almost all its brands.
2019 brought the write-down of Kraft Heinz’s poorly performing brands. First, the company revealed a $15 billion write-down of its Kraft and Oscar Mayer brands. Another write-down of $500 million was disclosed in the value of various other brands including Velveeta, Maxwell House, and Miracle Whip.
Kraft has since changed its strategy and focus to simplifying its product portfolio of processed food brands through fewer products with better profits. In September, executives revealed that they have changed their view from looking at its portfolio in terms of products to fulfilling different consumer needs. The company has been getting rid of falling products and sold its cheese business to the dairy firm, Lactalis, for $3.2 billion.
Fourth Quarter Results
Kraft Heinz was one of those companies that gained from the pandemic. As people stocked up on pantry staples and nostalgic foods, Kraft’s revenue jumped. in the fourth-quarter of 2020, net revenue soared 6% to $6.9 billion, topping expectations. The full-year revenue was reported at $26.2 billion with a profit of $256 million.
Founded in 1906, Planters joined Kraft in 2000 when it acquired Nabisco Brands, way before the Kraft Heinz merger. Best known for its Mr.Peanut icon that symbolizes the brand, it grabbed attention recently when it announced that it will be giving a $5 million reward to people and businesses that showed “little acts of extraordinary substance” during the covid-19 outbreak instead of paying for a Super Bowl ad.
The sale will allow Kraft to focus on its more successful brands like Lunchables and P3.
What The Sale Means For Hormel
For Hormel, Planter’s acquisition is the largest deal ever for the company, a spot which was previously occupied by the $850 million purchase of the meat brand Columbus in 2017. The Skippy-owner has been steadily snapping up smaller protein-centric food brands over the last five years. The move marks Hormel’s transition from a commodity meatpacker to a branded food company.
Hormel remains vulnerable to the volatility in the commodity market that comes with its lower margins. The company is home to several brands including Skippy peanut butter, Dinty Moore soup, and Justin’s nut butter that result in higher margins. The addition of Planters will certainly bolster Hormel’s existing portfolio.
Kraft Heinz’s shares are up 5% to $35.68 while Hormel shares have slipped 4% to $47.75. The deal is expected to close in the first half of 2021 subject to satisfaction of regulatory requirements.