M&A: Piecing Together a Natural-Foods Empire

Last April was a busy time at Hain Celestial Group. At its corporate headquarters on Long Island, not far from Manhattan, the organic and natural foods company was fast approaching its first $2 billion sales year. Irwin D. Simon–founder, chairman, CEO and president—was as usual perusing roll-up deals. At the moment, Simon was hot on the trail of an organic bakery called Rudi’s in Boulder, Colorado. Rudi’s was located near the Celestial Seasonings tea line he bought in 2000.

Later that month, Simon shook hands with the Charter Equity Partners deal team, paid the PE firm $61.3 million in cash and common stock and walked away owning an organic bakery. The bolt-on acquisition gave Hain Celestial about 60 new better-for you products, including wraps, pizza crusts, breads and bagels. Simon was happy to enter the fast-growing market for wholegrain, organic and gluten-free baked products without having to develop a product line from scratch.

In many ways, Rudi’s meets the classic Irwin Simon roll-up profile. Rudi’s has proven consumer appeal and enjoyed niche success, yet seemed stuck. Having been around since the early ’70s, the company’s products rang up on average barely $1 million a year. Growth seemed to have stalled. In announcing the deal, Simon disclosed plans to take Rudi’s “into new categories” through Hain’s wide-pipe distribution channels. He promised he’d bring Rudi’s into supermarkets, club channels and specialty stores around the world.

It was a smart bet he’d do just that. It was also a smart bet Simon would also do what he’d done dozens of times before: find ways to consolidate operations, possibly contract out manufacturing, and of course find those trademark synergies available through his global network reaching over 40 countries.

“Irwin is a great dealmaker,” says Mo Siegel, who helped create Celestial Seasonings herbal teas during the late-60s hippy heyday before selling to Simon. “He has put some good operators
underneath him. He is a really good communicator and is connected to a lot of people, knows what’s going on in the industry at all times. He follows his nose and sniffs out deals. I think in his sleep he dreams up deals.”

“Irwin is a great dealmaker. He’s a good communicator and is connected to a lot of people.”

That might be a stretch, but clearly scouting deals at industry forums and gatherings is one way Simon keeps his deal pipeline full. A major stop every year is the Expo West Natural Products trade show held in Anaheim in March. At shows like Expo West, the curly-haired, effusive Simon is the most recognizable figure in today’s natural and organic food sector, a walking exit plan for health-food company founders around the world.

“Irwin is very approachable,” says Siegel. “And he’s very fair. He strikes a reasonable deal. That reputation helps him get more deals.” While founders and key managers are often welcomed into the fold to oversee the post-deal integration, most do not stay on after the companies have blended.

In 2013, during a conversation at Simon’s headquarters in Lake Success, New York—he bought and moved into the sprawling structure built for the United Nations in the late 1940s—the acquisitive founder expounded on his approach to deal-making and his overall management philosophy. “At Hain Celestial, we’ve built out a strong infrastructure of sales, marketing and manufacturing,” he began. “My philosophy is that if we can find great companies that need these functions, and we can buy them and bring them into Hain, we can do better than if we started from scratch. All these acquired companies—their payables, their collections, their customer service, all their processes—can be run out of here. This makes for a lot of savings and enormous synergies. When these conditions are met, we are going to see a lot of growth.”

Many of Simon’s deals have been for small companies that seemed to hit invisible ceilings, then got energized within Hain’s global sales and distribution channels. A key part of Simon’s deal-making acumen is his ability to see M&A as a two-way street. Not only does he plug new acquisitions into his global network, but he absorbs the networks he’s just acquired and works those channels.

Buying Celestial Seasonings brought a transformative network of supermarkets and large grocery stores, vastly expanding what had been largely specialty channels. Buying Sensible Portions in 2010 brought a distribution deal with Costco and with that entry into the huge club channel. A series of deals in between have brought access to channels like Whole Foods, Walmart and—gasp!—7-Eleven. While best known for not-exactly-healthy products like slushies and beef jerkies, c-stores have been quietly stocking healthier snacks, bowing to consumer demand. Once again, Simon is pacing the trend curve.

Years ago, Simon feared his portfolio of organic grains and preservative-free snacks would stereotype him as a tree-hugging health-food nut driven by causes rather than spreadsheets. Evidently, that’s hardly the case; the man loves his occasional steak too much to fit anyone’s crunchy-granola stereotype. Nevertheless Simon has probably done more to bring better-for-you foods into the mainstream than anyone else.

“Deals don’t work if you chase them and overpay. You’ve got to have a good strategic plan.”

As for deal valuation, Simon genially waves off questions about preferred multiples and p/e ratios. In the past he’s mentioned “six or seven times EBIDTA” as his sweet spot. Today, with several deals possibly in the works, he stays mum.

“Deals don’t work if you chase them and overpay,” he declares. “You’ve got to have a good strategic plan, have good people responsible for the deal and be realistic in your numbers.”

Taking a philosophical turn, Simon drew a comparison between deals and marriage. “In both, you have to have the right partner and you have to come into the marriage with similar expectations,” he says. Making a deal solely to buy growth or earnings is like choosing a marriage partner solely on expectation of a dowry. “You don’t want to be pushing a square peg into a
round hole,” he notes.

As with marriage, when doing deals you better be prepared for stormy weather as well as blue skies. “Shit happens,” Simon shrugs. “You can work the numbers right but still, shit happens. The question is: What are you going to do about it?”

Piecing Together a UK “Powerhouse”
In the fall of 2011, after five years in the UK, Irwin Simon was struggling to turn his pieced-together collection of better-for-you UK brands into a consistently profitable whole. Always alert to potential acquisitions, Simon was hot on a Leeds company, the Daniels Group, a heavily leveraged food company coming off a $280 million sales year. Simon liked Daniels’ management,
systems and potential to serve as a growth platform. In October he bought Daniels for $230 million cash, tapping Hains’ credit line. The deal had synergy written all over it, in Simon’s handwriting. Back in the U.S., in a rare moment of bravado, the U.S. dealmaker boasted to an audience of analysts that his latest acquisition would become a UK natural foods “powerhouse.”

Daniels had bounced around under several Asian owners taking on growing debt the past decade. Simon took on Daniels’ debt along with its top brands: New Convent Garden Soup, UK’s
top-selling fresh chilled soup brand; the Johnson’s Juice, a popular fresh line of juices, puddings and smoothies; and Farmhouse Fare, a dessert favorite. These were well-known brands in a
vibrant market. Fresh and chilled products then accounted for half of UK food sales; the segment continues to grow.

“Under 7x EBITDA, is Simon’s deal-making sweet spot.”

Simon wasted no time filling his new channels with products from earlier UK acquisitions, including Linda McCartney’s chilled meat-free meals. He added a barrage of U.S. brands acquired piecemeal over the past 15 years including Celestial Seasonings teas, Earth’s Best organic baby foods, Rice Dream dairy-free drinks and Terra Chips vegetable snacks. Rob Burnett, Daniels’ leader, stayed on as CEO of Hain Celestial United Kingdom and set to work implementing a series of consolidations that optimized purchasing, procurement, manufacturing, warehousing and distribution processes. Next they culled several underperformers, discontinuing sandwich making and chilled-soup lines. The efficiencies and asset sales paid for the deal.

Less than a year later, Simon closed on an even bigger UK deal. In August 2012, he shelled out $318 million in cash and shares for a heavily leveraged Premier Foods. Simon paid under 7x
EBITDA, the cap he disclosed in June as his deal-making sweet spot. The acquisition brought such brands as Hartley’s and Robertson’s jams, Sun-Pat peanut butter, Gale’s honey and Frank Cooper’s marmalades into the fold, establishing Hain Celestial in the top 40 of all UK food and beverage suppliers. Hain also acquired Premier’s manufacturing plant in Histon, England.

Simon has continued shopping in the UK, adding each new acquisition to the Daniels platform. In 2013 he absorbed Ella’s Kitchen’s organic baby foods, a $70 million sales company he acquired
for an undisclosed price. Last year, he purchased Tilda, a branded basmati and specialty rice company, for $358 million.

He’s integrated his roll-ups into the powerhouse he promised in 2011. In Q2 2015, net sales in the UK soared 38 percent to $201 million, overshadowing 8 percent U.S. growth on revenues of $354 million. The future? “The company’s performance remains impressive, marked by record sales, efficient expense management and focus on productivity enhancement, which lead to profitable global expansion,” wrote Zacks Equity Research in August. “Hain Celestial is likely to sustain its strong momentum and appears favorably positioned to capitalize on the growing global demand for organic products.”


Welcome to Irwin Simon’s Tea Party
Simon’s first deal of the 21st century was a $390 stock-swap with Celestial Seasonings, a Boulder, Colorado herbal tea brewer. The deal provided an instant infusion of $100 million a year in sales, opened new channels into mass-market stores, brought on additional management savvy and added new production facilities. Hain’s took on the tea company’s $7.8 million in debt and emerged with a new name: the Hain Food Group was now Hain Celestial. Simon, who generally keeps his deal cards close to the vest, had publicly pursued Celestial for months through informal meetings with the tea company’s chairman and co-founder, Mo Siegel. The talks got serious just before the 1999 holiday season.

Founded in 1969, Celestial had come a long way from its small-batch origins and after 30 years in operation dominated the herbal tea category. Unlike most natural and organic food products, Celestial’s forte was the mass market; sales in supermarkets and other mainstream retail outlets accounted for 80 percent of sales. This channel strength appealed greatly to Simon.

“Irwin went from nothing to a big-cap company. I would not be surprised if it continues to get bigger. Irwin has done a great job.”

Siegel struck what analysts considered an advantageous deal; his shareholder s received 1.265 shares of Hain stock for each Celestial share. Hain at the time was trading around $32. Wall Street turned thumbs down, sending Hain’s share price tumbling $4.75, to $27.63, before recovering and surging forward. The feeling at the time was that he had overpaid.

Celestial chairman and co-founder Mo Siegel was named vice chairman of the combined board, which expanded to 11 members with the addition of himself and two Celestial directors.  Celestial’s CEO Steve Hughes left “to pursue other interests,” according to the deal announcement, but veteran manager Walt Freese came on board as vice-president and general manager for the tea brand and brought most of the sales team with him.

“Irwin and I had a similar mission, which was to build the largest natural products company in America,” Siegel recalled in a recent conversation. “The combination of the two companies was
a really good opportunity to do that.”

From his perspective, Simon obtained “the most glamorous brand he had ever been involved with,” one that had achieved household-name status. In contrast, Hain’s offerings at the time were smaller and more niche-oriented, including brands like Arrowhead Mills, Nile Spice and Westsoy.

As with nearly all mergers, the blending of Hain Food Group and Celestial Seasonings took some finesse. The companies had dramatically different cultures. Simon had started out in the early ’90s buying a Kosher food company, Kineret, then bought a couple of distressed California health food brands bearing the name Hain Pure Foods, adding them to the pot. As an executive,
Simon drew from early-career stints with both Slim-Fast and, paradoxically, Haagen-Dazs. Siegel, in contrast, started out as a pastoral entrepreneur, leading a bunch of teenage buddies who brewed natural teas from hand-picked herbs; no amount of business success could eradicate his laid-back Colorado style.

Siegel remained vice chairman for two years, helping supervise the post-merger integration. During that time Siegel fended off one of Simon’s signature post-merger moves: operation
consolidation.

Siegel recounts: “I dug in my heals and so did Irwin. We fought over that. I saw Irwin’s point: You consolidate shipping in order to save money. I just didn’t think that would work” given Celestial’s particular manufacturing issues. Siegel left soon thereafter, citing the rigors of travel and his desire to cut back from 70-hour work weeks. Simon went ahead with consolidation.

Reminiscing over the company’s history—the Celestial founder still lives in Boulder, remains active in the industry and still holds Hain Celestial stock—Siegel recalled the 2000 merger as pivotal in Simon’s relentless expansion. “It’s not easy building a company to this size,” Siegel says. “Irwin went from nothing to a big-cap company.“ (Its current valuation is $6.4 billion.) “I would not be surprised if it continues to get bigger. Irwin has just done a great job.”

 

This article can be found in Chief Executive magazine, September/October 2015 issue, page 36.

Warren Strugatch :Warren Strugatch is a writer, speaker and consultant based in Stony Brook, NY. He covers economic development, global business, management and marketing.