Another organic food producer is getting the corporate treatment as more and more food companies look to capitalize on consumers' increasing demand for organic food.
The WhiteWave Foods Company (NYSE:WWAV), owner of several dairy brands like Silk, Horizon Organic, and Land O'Lakes, has announced plans to buy Earthbound Farm, a leader in the U.S. organic produce market. After the announcement on Dec. 9, WhiteWave shares closed at $22.92, up 5 %. WhiteWave will pay about $600 million for the company, and the purchase gives WhiteWave entry into one of the more profitable areas of the organic food segment.
The growth in sales of organic produce has been confirmed by the U.S. Department of Agriculture, or USDA, and the agency has noted:
...industry analysts estimate that U.S. organic food sales were $28 billion in 2012 (over 4 percent of total at-home food sales), up 11 percent from 2011. Produce (fruits and vegetables) and dairy are still the top two organic food categories, accounting for 43 and 15 percent of total organic sales in 2012...
Earthbound Farm produces packaged salads, dried fruits, and snacks, along with organic fresh and frozen fruits and vegetables. According to WhiteWave, the acquired company is expected to have sales for 2013 in excess of $500 million. WhiteWave plans to run Earthbound Farms as a separate business with no major changes to its operations.
After the transaction is completed in the first quarter of 2014, Earthbound Farm is expected to add about $0.07 per share to Whitewave's earnings. WhiteWave plans to finance the transaction by increasing its current credit facilities by $500 million .
Organic dairy demand beats traditional milk consumption
While WhiteWave's natural and organic business has thrived, the company's former parent Dean Foods (NYSE:DF) faces challenges in its traditional dairy business. After spinning off its interest in WhiteWave in May 2013, Dean Foods has positioned itself in the U.S. dairy industry as the largest processor and direct-to-store distributor of fluid milk. Third-quarter results, however, showed continuing declines in its fluid milk share performance. The company was able to offset volume declines by reducing distribution costs by about $15 million in the third quarter, as well as achieving a $38 million reduction in SG&A expenses.
Going forward the company will have to deal with high raw milk costs and soft milk sales. Its plan of action to improve results includes closing eight to 12 plants to improve efficiency, adding new business, and increasing free cash flow . While traditional milk sales are declining, organic milk product volume is increasing -- WhiteWave reported an increase of 3% over last year in its premium dairy segment for its third quarter of fiscal 2013, which includes its Horizon Organic dairy brand . It will be interesting to see if Dean Foods decides to add new organic products to its business.
Danone adds an organic baby food line
Danone (NASDAQOTH:DANOY) is another company investing in the organic food market, but the new business won't be joining its fresh dairy business. In June 2013, the company acquired Happy Family, a fast-growing premium organic baby food brand considered the fourth largest company in the U.S. baby food market. Danone purchased a 91.9% equity interest in Happy Family .
Happy Family's revenue nearly quadrupled in 2012 to $62.3 million from $13.3 million in 2010. An interesting side note -- the company's founder mentioned Danone as an ideal corporate partner for the brand in her original business plan, due to Danone's focus on health and social responsibility .
Danone's baby nutrition segment was hurting during fiscal 2013's third quarter and it experienced a decline of 8.6% in sales growth. During the quarter, the company was negatively affected by a false alert issued by Fonterra, a New Zealand-based dairy company, which resulted in the recall of certain baby formulas in eight Asian markets. Action plans were put in place to recoup lost sales, but the company still expects a significant decrease in full year results for 2013 .
My Foolish conclusion
WhiteWave Foods Company's expansion into organic produce should prove to be complementary with its dairy business. While its rival Danone is also buying into the organic food space, it remains to be seen if Dean Foods will also look toward the organic segment to boost its business.
One of the more critical aspects of the WhiteWave buyout is the claim that operations at Earthbound Farm will not change, which is important to maintain the integrity of the brand. To ensure that WhiteWave's latest acquisition is a success, consumers of organic produce should not doubt that the Earthbound Farm brand will stay true to its organic farming roots.
Eileen Rojas has no position in any stocks mentioned. The Motley Fool owns shares of Dean Foods Company and WhiteWave Foods. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.