MiBiz 2017 M+A Deals & Dealmakers Awards Finalist: Deal more than $150 million
For its first acquisition following the transformational deal that created SpartanNash Co., the grocery retailer and distributor opted to buy a company that positioned it in a related high-growth market.
SpartanNash (Nasdaq: SPTN) on Jan. 6 completed the $214.6 million deal to acquire certain assets of the privately-held, Indianapolis-based Caito Food Service Inc., a supplier of fresh fruit and vegetables to grocery retailers and foodservice distributors in 22 states, according to a quarterly report filed with securities regulators. The deal also included Caito’s Blue Ribbon Transport business, which offers temperature-controlled distribution and logistics services across North America.
Byron Center-based SpartanNash funded the purchase with its lending facility, at the time saying the acquired companies would generate annual revenues exceeding $600 million.
The deal included an earn-out potential of a collective $27.4 million for the sellers if the business hit certain performance targets in the first three fiscal years after the acquisition, according to a securities filing in August.
Assets in the deal included $77.5 million in property and equipment, $72.9 million in intangibles, plus working capital. The purchase price accounted for $45.2 million in goodwill related to the workforce at Caito and Blue Ribbon Transport and savings from expected synergies, the company said in the securities filing.
SpartanNash was recognized as a finalist in the 2017 MiBiz M&A Deal of the Year award in the category for transactions valued at greater than $150 million.
Via a spokesperson, the company declined to participate in interviews for this report.
Importantly for SpartanNash, the acquisition also included the newly-built, $32 million, 118,000-square-foot Fresh Kitchen. The USDA-certified “best-in-class” facility in Indianapolis processes, cooks and packages fresh, ready-to-eat “protein-based foods and complete meal solutions.”
The addition of the Fresh Kitchen operations “represents a new line of business for the Company in a fast growth category,” according to an earnings statement from SpartanNash after completing the acquisition.
“[W]e are excited about the potential they provide for both the fresh-cut fruits/vegetables and freshly prepared meal solution offerings, which are right in line with the ever-increasing consumer demand for convenience,” President and CEO David Staples said in a statement in August announcing the company’s second quarter earnings.
“As we integrate the operations of our recent acquisition … [and] refine and expand production in our new Fresh Kitchen facility, … the positive momentum in our distribution operations will continue to drive growth as more customers will benefit from our expanded product offering and innovative solutions,” Staples stated.
The deal also added fresh-cut fruits and vegetables and other meal solutions to SpartanNash’s portfolio of products that it supplies to grocery retailers and foodservice distributors. Aside from the Fresh Kitchen facility, the deal for Caito included facilities in Indiana and Florida.
According to securities filings, SpartanNash pursued the deal “to strengthen its fresh product offerings to its existing customer base and to expand into fast-growing, value-added services, such as freshly-prepared centerplate and side dish categories.”
For the U.S. supermarket industry, prepared food departments are expected to grow at a rate of 3.8 percent for 2017, double the pace of the overall industry, according to research firm Datassential of Chicago.
In a column on industry publication SmartBrief, Datassential Senior Publications Manager Mike Kostyo described supermarket prepared food as the “fastest-growing segment of the foodservice industry.”
The Arlington, Va.-based Food Marketing Institute estimated the sales of deli and fresh-prepared foods for supermarkets at $15 billion last year, a growth of 5.5 percent.
POSITIONED FOR THE FUTURE
Contributions from the higher-margin Caito business helped to buoy SpartanNash’s sales in each of the first two quarters of the company’s 2017 fiscal year, which were up 5.4 percent and 3.7 percent, respectively.
The company began integrating Caito into its operations in the first quarter, but reported in the second quarter that the process and the launch of the Fresh Kitchen facility “have been slower than anticipated.”
That slower integration and longer startup process led SpartanNash executives to walk back their initial expectations that the Caito/Blue Ribbon deal would be accretive to earnings in the 2017 fiscal year, but they said it would be accretive for 2018.
For the 28-week period that ended July 15, Fresh Kitchen startup costs were more than $4.6 million, according to a securities filing.
“We continue to see progress integrating the recently acquired operations, have begun limited production at the Fresh Kitchen facility and remain confident about the ultimate growth potential and long-term vision for this business, and its ready-to-eat categories,” Interim CFO Tom Van Hall told brokerage analysts during the company’s second quarter earnings call in August.
“We now expect the transaction to be accretive in the second year as we get the required systems in place over the last half of this year, adjust fully to the existing volume levels in produce distribution and attract additional volume into our Fresh Kitchen operations,” Van Hall said.
For his part, Staples said the capabilities added with the deal and the Fresh Kitchen facility in particular have started to open new opportunities for SpartanNash, including a potential partnership with a “significant customer” he declined to name.
“Now we have to execute on those opportunities,” he said, “but one of those opportunities is really an exciting move into what we think is a really hot space, and a space that is right on trend with where the world’s going.” n