Hormel Foods Corp. is acquiring Sadler’s Smokehouse, a pit-style barbecue brand from Texas, for $270 million, the latest deal expanding the company’s deli and food service business.
The all-cash offer was announced Thursday morning with the company’s latest earnings. It’s the latest acquisition by Austin, Minn.-based Hormel of a business that helps grocers and restaurants make meal prep more convenient.
Busy shoppers increasingly seek grab-and-go prepared meals from grocery stores. At the same time, high labor costs pressure restaurants, cafeterias and other food service kitchens to simplify food prep for its workers. Hormel has been expanding the meats it offers to deli consumers and food service vendors through acquisitions in recent years.
Henderson, Texas-based Sadler’s is a family-owned business specializing in pit-smoked meats sold to retail and food-service customers. Hormel has been one of Sadler’s largest customers for more than 20 years, buying smoked meats for its Austin Blues food-service brand.
Hormel Chief Executive Jim Snee likened the deal to its purchases of pizza-topping maker Burke Marketing Corp. in 2007 and food-service meat maker Fontanini Foods LLC in 2017.
“The beauty of these deals is it really is a one-on-one negotiation based on relationships you’ve built over decades,” Snee said. “We’ve talked about our ability to do a bigger deal, and that remains, but it has to be the right deal. If we have deals like Sadler’s, Fontanini and Burke that come along on a regular basis, we will take them all day, every day — absolutely.”
The deal is expected to close next month. Structured as an all-cash asset purchase, Hormel will receive a $40 million tax benefit, effectively knocking down the price to $230 million, just nine times the pretax earnings of Sadler’s, said Jim Sheehan, Hormel’s chief financial officer.
But Hormel plans to immediately upgrade some of Sadler’s production facilities, which will have a neutral to slightly negative effect on its full-year results.
Hormel said its profit for the three months ended Jan. 26 was $242.9 million, up nearly 1% from a year ago. That amounted to 45 cents a share, a penny shy of Wall Street’s expectation for the quarter, the first of Hormel’s fiscal 2020.
Revenue was $2.4 billion, up 1% and above the consensus forecast of analysts polled by Thomson Reuters.
The company’s shares on Thursday fell 6% to $45.53.
Like many other multinational corporations, including Minnesota-based Ecolab and Medtronic, Hormel raised a warning about the effect the coronavirus outbreak in China could have on its business there.
Hormel owns and operates three plants in China. The biggest bulk of its sales there are pork products to restaurants and other food-service outlets.
“The food-service industry has essentially come to a halt in China,” Snee said. “People aren’t dining out.”
But it’s not just the demand that’s disrupted. Since the Lunar New Year, which started Jan. 25, the majority of Hormel’s workers have not returned to work because of travel restrictions and quarantine mandates imposed by the Chinese government.
“You’ve got both sides of the supply-demand equation affected,” Snee said. “We understand where we are today, but the problem is forecasting when do we start to see it change. It’s really too early to call.”
Hormel’s smaller retail business has received a slight bump in sales of shelf-stable products in China, including Spam and Skippy peanut butter. Those products are a much smaller portion of its business there and don’t come close to offsetting the losses.
Even so, Hormel reaffirmed its full-year net sales and earnings guidance. Executives cited strength in its turkey and refrigerated-foods businesses.
The company’s Jennie-O Turkey Store, which has been battered for several years because of an oversupply of turkey, food-safety recalls and other market challenges, appears to have turned the corner. The business unit, which is based in Willmar, Minn., and represents about 15% of Hormel’s overall sales, posted its second consecutive quarter of volume, sales and profit growth.
“With two strong quarters of growth, we now have momentum,” Snee said.
Kristen Leigh Painter • 612-673-4767