Hormel agrees to buy organic and natural meat maker Applegate Farms

The maker of Spam is going organic.

Hormel Foods Corp. said Tuesday that it has agreed to buy Applegate Farms, a leading organic and natural meat maker, for about $775 million. The acquisition would be Austin-based Hormel's largest — and a big play in the hot market for natural foods.

The deal for Bridgewater, N.J.-based Applegate is the third large acquisition for Hormel over the past two years, as the packaged food company looks to further diversify.

"We are very excited about Applegate and getting into a dynamic and growing category," Hormel CEO Jeffrey Ettinger said in an interview with the Star Tribune. The organic and natural meat business "is a channel where we don't have a material presence."

Privately held Applegate, founded in 1987 by longtime CEO Stephen McDonnell, produces bacon, sausage, hot dogs and many other products. Applegate, partly owned by private equity outfit Swander Pace, reportedly put itself up for sale last winter, and there were rumors Hormel was interested.

The deal was announced after the stock market closed. But in after-hours trading, Hormel's shares were up 3.3 percent to $58.50.

"Natural and organic is where it's at," said Brian Yarbrough, a stock analyst at Edward Jones. "That is where the growth is, and that is where it will continue to be as more people are focused on health and wellness."

Applegate, which is expected to have $340 million in sales this year, will operate autonomously as a stand-alone subsidiary of Hormel's refrigerated foods division.

Hormel does more than $9 billion in total annual sales, and its core businesses are Jennie-O turkey, canned foods such as Hormel chili and refrigerated meats — particularly pork.

Applegate has about 100 employees in New Jersey, and the company will continue to be run by its core management team plus four to six people from Hormel who will relocate, Ettinger said. Eventually, Hormel will hire a top executive for the unit.

McDonnell will be on an advisory board that will consult Hormel on Applegate's business, Ettinger said. "We have no intention of changing the brand."

McDonnell said as much in a statement on Applegate's Facebook site Tuesday.

"As I looked to sell the company, the most important thing for me was finding a partner that would let Applegate keep being Applegate," he wrote. "At first glance, Hormel Foods may not seem to be a likely partner to do business with. But I believe that Hormel Foods is buying us because they believe we are doing something right."

McDonnell also wrote that Applegate will continue to support antibiotic-free agriculture, humane animal treatment and the labeling of food products that contain genetically modified organisms (GMOs).

Hormel has given money to anti-GMO labeling efforts in the past.

The deal underscores the fact that many of the nation's leading organic and natural food brands are owned by large packaged foods companies. For instance, Golden Valley-based General Mills Inc. last year paid $820 million for Annie's Inc., best known for its organic and natural macaroni and cheese.

Such deals often get pushback online from organic fans that are wary of "Big Food," as they regard the Hormels and General Mills of the world. "Nooooooo — another company we trust selling," said one posting on Applegate's Facebook page Tuesday.

To such criticism, Ettinger said: "Our hope is that consumers will give us a chance."

The Applegate purchase is expected to close within 60 days. It's expected to be neutral to Hormel's earnings per share in its fiscal year 2015 and accretive by about 7 to 8 cents per share in fiscal 2016.

In dollar value, the Applegate deal tops Hormel's $700 million purchase in 2013 of the Skippy peanut butter brand from consumer products giant Unilever. Last year, Austin-based Hormel shelled out $450 million for California-based CytoSport Holdings, maker of Muscle Milk.

The Applegate buyout appears to be the dearest of the three, with the deal price measured at 2.3 times Applegate's annual sales, Yarbrough said. "But natural and organics is where the growth is, so you've got to pay up."

The thread among the three acquisitions is Hormel's expansion into different protein-based businesses. The buyouts have also been on a larger scale for Hormel than in the previous decade.

"We certainly have been aiming at deals that will better move the needle," Ettinger said.

Until Hormel's recent spate of deals, the company's biggest acquisition was its 2001 buyout of turkey rival the Turkey Store for $334 million, or $446 million in today's dollars.

Mike Hughlett • 612-673-7003