Hormel Foods Muscles In on Protein Supplements Business

The company will buy the Muscle Maker protein drink business for $450 million.

Jul 3, 2014 at 9:06AM

Muscle

Source: CytoSport.com.

Protein comes in many flavors, and with U.S. sales of packaged foods sporting protein-related claims on their labels gaining 50% over the last four years, it's the driving force behind a number of acquisitions this year and is why Hormel Foods (NYSE:HRL) is willing to pay $450 million for protein supplement drinks maker Muscle Milk.

Pricing for beef and pork are at record levels this year as drought and disease have decimated herds and litters. Cattle herds are at their lowest levels since the 1950s and piglets are succumbing to porcine epidemic diarrhea virus, or PEDv, at alarming rates, with as many as 7 million pigs dying by the end of February, though rates of decline have since slowed with the onset of summer.

According to the market watchers at Rabobank, the spike in beef and pork prices is causing consumers to switch to poultry, which in turn is leading to rising chicken prices, with 2014 promising to be one of the most profitable years in the last decade. The U.N.'s Food & Agriculture Organization forecasts there will be 227 pounds of meat and dairy consumed globally per person annually by 2030, up from 156 pounds some 10 years ago, still managing to outpace population growth. 

No wonder protein producers are willing to pay up. Tyson Foods was willing to pay top dollar, or $7.7 billion, for packaged meats producer Hillshire Brands to ensure that Brazilian rival JBS didn't cut into its market-leading share of the protein business. Post Holdings acquired egg and dairy producer Michael Foods for around $2.5 billion in March and last September bought protein bars, shakes, and nutritional supplements maker Premier Nutrition. Also in 2013, Hormel acquired the Skippy peanut butter brand from Unilever for $700 million and China's WH Group bought Smithfield Foods for $4.7 billion.

The folks at Nielsen say that in the 12-month period ending this past Feb. 15, sales of protein-related products rose to $7.5 billion. It's no coincidence that during this period protein-rich Greek yogurt also exploded onto the scene. Industry-leading Chobani, despite some well-publicized problems, scored a $750 million loan from hedge fund operator TPG Capital in April and is rumored to be positioning itself for an initial public offering. Protein, in whatever form, is hot.

Muscle Milk's maker CytoSport is expected to record annual sales in 2014 of approximately $370 million, with Hormel estimating its acquisition of the protein-rich drink will add about $0.05 per share to to its fiscal 2015 earnings (and will be neutral to earnings this year even when including transaction costs). The product line has grown from a protein powder introduced in 2000 to include ready-to-drink beverages and protein bars as consumers look for ways to add protein to their diet. 

Powder

Source: MuscleMilk.com.

Hormel will add the business to its specialty foods group that has been suffering from falling sales, volumes, and profits. Last quarter, dollar sales were down 12%, volumes were off 14%, and operating profits plunged 26%. The division produces whey protein concentrate and dry milk blends already and serves as a supplier to Muscle Milk's maker, and when complete the acquisition will ensure Hormel Foods will keep others from muscling in on its territory.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Post Holdings and Unilever. 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.

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