General Mills Targets Organics Industry With Small Planet Foods Acquisition

MINNEAPOLIS—The end of 1999 was also the end of the era of large, privately held natural foods manufacturers in the natural products industry.

Mainstream cereal giant General Mills (GIS) on Dec. 15 announced it had signed an agreement-in-principle to purchase Sedro-Woolley, WA-based Small Planet Foods for undisclosed terms. The announcement put to rest rumors, which surfaced regularly during 1999, regarding a number of possible Small Planet deals.

Although terms of the acquisition were undisclosed, Laura Huskins, an analyst at Boston-based investment bank Adams, Harkness & Hill, says that the normal multiple paid for a food company in the natural products sector is between 1x and 2x revenues, depending on the strength of the brands.

The acquisition includes Small Planet’s Cascadian Farm brand and Muir Glen line, with combined annual sales of about $60 million, but does not include its Fantastic Foods business. Fantastic will continue to be owned by Burbank, CA-based Trefoil Capital Investors II. Trefoil Capital is managed by Shamrock Holdings, the investment company of the Roy Disney Family. Fantastic Foods was not included in the deal because GIS is more interested in the organic segment of Small Planet’s business, according to Chris Shea, president of the new GIS venture that includes Small Planet. However, industry sources report that the Fantastic Foods brand has been underperforming in the already saturated and flat cup-of-soup market.

The acquisition is expected to be modestly dilutive to GIS earnings, about $.01/share to $.02/share, in FY00.

Small Planet will function as an independent subsidiary of GIS. Gene Kahn, Small Planet’s CEO, will continue to lead the business in that position and also will become a VP at GIS. According to Kahn, Small Planet is committed to its traditional relationships with brokers and distributors in the natural foods channel. All operations for Cascadian Farm and Muir Glen will remain in place, but there will be some consolidation of departments in Sedro-Woolley, WA, including accounting, marketing and customer service.

According to Kahn, Small Planet’s growth plans are aggressive for FY00. “My goal is to grow our company to $500 million in the near term,” Kahn says. “We have a very aggressive growth plan through acquisitions and through channel and distribution growth. Because of General Mills, we also have a large international opportunity.”

Kahn says that increasing supply is no problem. Small Planet has large farming projects that are capable of ramping up to meet increased demand, and there are synergies with GIS’s manufacturing capabilities.

Bonnie Tonneson, an analyst in the San Francisco office of investment banker Hambrecht & Quist, sees access to distribution as one of the main benefits to Small Planet in this deal, while GIS gets easy entry into the category just as Kellogg Co. (K) did with its recent acquisition of meat-alternative-products manufacturer Worthington Foods.

Tonneson does not think Kellogg and GIS are in a direct fight for market share in natural products but sees a broader trend in play. “We’re seeing a group of independent players who have grown healthily and are ripe for acquisition,” Tonneson says. “We’re going to see more of these types of acquisitions.”