Lunchmeat maker Hormel orders up Skippy sandwich

[January 04, 2013]  NEW YORK (AP) -- Hormel Foods apparently has a hankering for a peanut butter and bacon sandwich. The company primarily known for Spam and other cured, smoked and deli meats said Thursday that it's buying Skippy, the country's No. 2 peanut butter brand, in its biggest-ever acquisition.

Skippy, which was introduced in 1932 and is a staple in American pantries, is intended to increase Hormel's presence in the center of the supermarket where nonperishable foods are sold. It also gives the Austin, Minn.-based company a stronger footing in international markets. Skippy is sold in about 30 countries and is the leading peanut butter brand in China, where Hormel has been trying to build up its Spam business for the past several years.

Hormel, which also makes canned chili, sausages and pepperoni, currently gets the vast majority of its sales in the U.S., with only about 4 percent of revenue coming from abroad. Now the company is hoping that Skippy, which it's buying from Unilever for $700 million, will help it expand at home and overseas.

In a conference call with analysts, CEO Jeffrey Ettinger noted that peanuts and peanut oil are popular in China. And although peanut butter is not yet a household staple there, he said it is growing rapidly.

Back at home, Ettinger said peanut butter is already regarded as a convenient and affordable source of protein and that Hormel would apply its innovation skills and "take Skippy out of the jar" for use in other products such as packaged snack foods.

For example, he noted that the company recently introduced pepperoni sticks as part of a push to grow its snacks business. With Spam, the company is testing shelf-stable, microwavable meals, such as jambalaya made with Spam. It's also considering a variety of macaroni and cheese made with Spam.

"That concept of taking (Skippy) out of the jar echoes a similar concept we're trying with taking Spam out of the can," Ettinger said in an interview.

For now, there are 11 varieties of Skippy in the U.S., including low-fat and natural varieties. Hormel noted that Skippy is the leading brand in the faster-growing subcategory of natural peanut butter. Overall, Skippy has about 17 percent of the U.S. peanut butter market, according to Euromonitor International. Jif, owned by J.M. Smucker Co., is the largest brand with about 37 percent of the market.

Although Skippy is "a good fit" with its other packaged foods, Ettinger said Hormel still needs to figure out how to handle its merchandising of Skippy in stores, such as whether to display it next to other items.

Swings in peanut butter prices have made growth volatile in recent years, but Skippy sales on average have increased about 4 percent annually on a normalized basis, according to a spokesman for Unilever. The American Peanut Council estimates that Americans eat an average of nearly 4 pounds of peanut butter a year.

Hormel expects annual Skippy sales of about $370 million, with almost $100 million of that from outside the U.S. Ettinger expects Skippy sales to grow in the low single digits domestically and in the high single digits overseas.

The deal includes Skippy manufacturing plants in Little Rock, Ark., and Weifang, China. Hormel Foods Corp. said that it expects the deal to modestly add to its fiscal 2013 results and add 13 cents to 17 cents per share to fiscal 2014 earnings.

The transaction, which still needs regulatory approval, is expected to close in two parts. The domestic closing is expected by the second quarter and the China business is expected to close by the end of the year.

As Hormel continues to grow, Ettinger said future acquisitions could be larger than they have been in recent years. "It's an $8 billion company now. You have to move the needle," he said.

Unilever, based in the Netherlands and the U.K., is one of the largest consumer products companies in the world. It makes Vaseline, Dove soaps and Lipton tea. The company had indicated last year it was considering selling Skippy as part of a strategic review.

Hormel shares rose $1.19, or 3.7 percent, to close at $33.20 Thursday.

[Associated Press; By CANDICE CHOI and MICHELLE CHAPMAN]

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