Breakingviews - Capital Calls: Hormel’s snack splurge

Cans of Hormel Foods Corp's Spam are pictured at a news conference in Tokyo December 11, 2008. REUTERS/Michael Caronna

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A LITTLE BIT NUTS. Hormel Foods is buying peanuts, but at a price that is anything but. The $27 billion maker of meat products including World War Two staple Spam is buying Kraft Heinz’s nut business, including the Planters brand, for $3.4 billion.

The math looks salty. Hormel will acquire a business with just over $220 million of EBITDA this year, the company’s presentation suggested on Thursday. Deduct depreciation equivalent to, say, 2% of sales, and that leaves $200 million of operating profit. After tax, it’s a return on investment of just 5.7%.

Sure, there are “synergies” of up to $60 million. Hormel has other nut-based products like Skippy peanut butter. But these benefits could take until 2024 to come through, and roughly a third of them depend on making extra sales, rather than cutting costs. Even factoring them in fully, the return is still less than 8%.

That may explain why shareholders docked about $1 billion of Hormel’s market value on Thursday. The retreat from meat doesn’t come cheap. (By Amanda Gomez)


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