Natural Foods Merchandiser

Hain to acquire Spectrum Organics

Spectrum Organics will be acquired by The Hain Celestial Group in a $34 million deal that gives Hain not only a market-leading set of food brands but a major ingredients producer and its first supplements brand as well.

Hain, based in Melville, N.Y., said Aug. 23 that it will pay 70.5 cents per share of Spectrum, a 4 percent premium from its closing price the day before. The half-cash, half-stock deal requires approval from shareholders of Spectrum, which is traded on the Nasdaq bulletin board market.

With the purchase of Spectrum, said Neil Blomquist, its president and chief executive, Hain intends to create a seventh operating division, based in Petaluma, Calif., Spectrum?s home, for oils and condiments.

?It?s been pretty clear who the brand leader has been in this category,? said Jethren Phillips, Spectrum?s founder and chairman of the board. ?They recognize that we know the oils and fats category better than they do.?

The maker of culinary oils, vinegars, butter substitutes, salad dressings and essential fatty acid supplements had $49.9 million in sales in fiscal 2004. Hain posted $544.1 million in sales last year.

Hain spokeswoman Mary Anthes said the company is in a quiet period pending the sale and can?t provide any detail.

?There?s lots of things we have yet to do in assessing the business,? Anthes said.

Phillips founded Spectrum in 1986 to bring Canadian expeller-pressed canola oil to the U.S. market. Spectrum was among the first companies to offer a certified organic line and certify its products as free from genetically modified ingredients. Its current line includes 175 products.

In 2004, Spectrum opened a flax processing facility in Iowa. Expenses from that startup, and higher costs for imported oil products because of the weak dollar, caused the company to post an $833,000 loss in 2004.

Phillips said Spectrum went looking for capital last year, but the combination of being public, small and posting a loss meant no one wanted less than a controlling interest. ?We couldn?t get any sort of valuation that made sense,? he said.

Spectrum began again with a list of 80 mostly strategic buyers from both the conventional and the natural/organic sides. Suitors were eventually winnowed to Hain.

Retailers will benefit, Blomquist said, as more capital from Hain allows Spectrum to boost promotion and marketing spending. Recent marketing efforts have focused on moving perimeter naturals shoppers—who buy fresh produce, meat, dairy and baked goods—into the center store.

Retailers ?have always relied on us? to educate customers on the benefits of healthy fats and oils. ?It?s not an easy subject,? Blomquist said.

Spectrum?s financials show increasing sales and profits as consumers seek healthier fats for both cooking and supplementation. The company posted net sales for the second quarter of $14.4 million, up 13 percent from a year ago. Its net income rose in all three of the company?s business segments.

The Spectrum Essentials line of EFA supplements represent Hain?s first purchase in the supplements category, Blomquist said. ?It took a while for them to get their arms around that, but once they did, they were all over it.?

Earlier this year, Hain divested its Kineret and Kosherific frozen food brands to Kedem Food Products International for an undisclosed sum. It is looking for a buyer for its Estee sugar-free line and pruned about 500 SKUs worth $15 million, killing duplicative and slow-moving products and the whole CarbFit product line.

Phillips described Hain?s recent thinning-out process as key to surviving and profiting in an era of consolidation among retailers and distributors. ?The industry has always been over-SKUed and overbranded,? he said. Hain is ?trying to focus on fewer brands with larger scale … they?re refining and maturing themselves as they go. Both Neil and I are encouraged by that.?

Hain CEO Irwin Simon told The Natural Foods Merchandiser in June that the company is looking to lower production costs by buying consumer brands that are also ingredient suppliers, such as College Hill Poultry.

Hain divisions such as Terra Chips ?use a lot of oil,? Phillips noted.

During the transition, Blomquist, who has been with Spectrum for 16 years, will stay on as CEO for at least one year. Phillips will consult on supply-side management and assist with further merger activity.

Natural Foods Merchandiser volume XXVI/number 10/p. 14

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