US-based organic and natural foods producer Hain Celestial Group is eyeing growth in Europe following its recent acquisition of two UK-based operations from Heinz, including the Linda McCartney frozen meat-free brand. Ben Cooper reports.

Having already attracted considerable attention in the US, the name Hain Celestial is set for a higher profile on the other side of the Atlantic too, following its recent acquisition of the Linda McCartney brand from Heinz.

Since its launch in 1993, the Nasdaq-listed company has grown rapidly, acquiring a host of companies. It will post revenues in excess of US$730m for the 2006 fiscal year. However, while it has been operating in Europe for some time, most of its turnover is generated in the US, and it is that which is likely to change, not least as a result of two acquisitions from Heinz.

Earlier this month, Hain Celestial completed the purchase of the Linda McCartney brand (under licence) frozen meat-free business from Heinz, including a manufacturing unit in the UK, for an undisclosed sum. This followed the company’s purchase of Heinz’ Fresh Prepared Foods Business in Luton in May.

Sales of the Linda McCartney brand are only around GBP10m to GBP11m ($18-20m) at present, concentrated in the UK, but Hain has a track record of acquiring small organic and natural food brands and growing them relatively quickly.

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“The two acquisitions have given us significant critical mass in the UK, and it gives us routes to market for growing the Hain Celestial business in the UK,” said Hain Celestial UK’s managing director David Arrow, adding that there were also “significant growth opportunities” in continental Europe. “We’ve already got a fairly significant presence in mainland Europe and where there is a complementary fit we will certainly look to exercise some synergies.”
As for the immediate growth potential of Hain’s European operations as a whole, the company’s vice president of investor relations Mary Anthes was cautiously optimistic. Hain’s total European turnover is expected to rise to between $160 and $170m this year, from $84m last year, primarily as a result of the UK acquisitions. The company’s president and CEO Irwin Simon has said he is aiming for $250m turnover in Europe, and Anthes believes this is realisable within three to five years.

The Linda McCartney acquisition also offers growth potential in the US where Hain has been a contract manufacturer for the brand for some time. “The Linda McCartney brand is certainly known in the natural channels (in the US) but we feel there is an opportunity to expand the brand further,” Anthes told just-food.

The acquisitions from Heinz came about as a result of a desire on the part of Heinz to focus on its core activities, and by the same token there could be a direct benefit for these two operations in being owned and managed by a specialist company with experience in precisely the relevant market sectors.

“We are very excited by the prospects for further developing the Linda McCartney brand,” Arrow said. The company is currently assessing the brand as it stands, but plans to use its knowledge of the natural and organic food segments to broaden the range and bring new consumers to the brand. “What we need to do is to make the products more appropriate to more people, tapping into our understanding of the market.”

The McCartney family was certainly enthusiastic about a specialist company taking over the brand, describing Hain as a “leading light” in organic and natural foods. This sort of endorsement is illuminating, suggesting that Hain has considerable credibility as a committed player in the organic and natural food movement.

While cynics may see Hain solely in terms of an ambitious, fast-growing company exploiting exciting growth markets, others see the company as a pioneer, playing a vital role in spreading the organic message – while doing rather well financially at the same time.

And there seems little doubt about the financial benefits. The company recently posted net income of $9.7m for the third quarter to the end of March, up 27% from $7.7m last year, on sales 22% higher at $196m.

Just before Hain’s third-quarter results were announced, Bear Stearns analyst Terry Bivens raised the company’s price target from $24 to $33, saying that fundamentals at Hain, which the broker rates at “outperform”, appeared to be strengthening. Meanwhile, Scott Mushkin of Banc of America Securities initiated coverage of the stock with a buy rating and a target price of $33.00.

However, there is a sting in the tail. Blazing a trail in a growth market attracts the attention of large and powerful food groups which are eyeing those enviable growth rates. “Due to the attractiveness of the categories in which Hain competes, further entry by larger food marketers is likely and poses risks of share losses,” Scott Van Winkle, an analyst with Canaccord Adams, said in a research note.

However, Hain Celestial appears to be relishing the challenge of larger companies stepping up their activities in its core market segments. Arrow said he believes Hain can “hold its own” in a heightened competitive environment and, moreover, maintains that the presence of higher profile food companies could benefit Hain’s brands. “It actually can work in our favour as well because multinational brands putting marketing behind a niche area can create a halo, and create a benefit for Hain Celestial brands already in place,” Arrow said.

Of course, there is also the chance that in addition to wanting a slice of the action, a large food group may just fancy a slice of Hain itself, or even try to acquire it wholesale. Richard Joy of Standard & Poor rates the stock as a “buy”, but points out that Hain’s leading positions in 13 of the top 15 natural and organic food categories, make the company “an attractive acquisition target for big food companies”.

Whether or not Hain Celestial were to become the subject of takeover speculation, there is another reason why large food corporations may look at the company covetously. While shareholders may find the healthy financials more persuasive than Hain’s position as an organic standard-bearer, the fact that a company can prosper commercially while also participating in a popular consumer movement will not be lost on shrewder investors. At a time when major food companies lurch from one public relations crisis to another, Hain and its ilk have a PR message to die for.