Hormel Foods Corp. has paid $425 million for Fontanini Italian Meats and Sausages, a Chicago-based maker of Italian meats that are chiefly sold to restaurants.
The company, which was owned by Capitol Wholesale Meats Inc., specializes in sausages, pizza toppings and meatballs and has a new production facility in McCook, Ill., that is considered state of the art.
"The Fontanini brand is highly regarded, and the addition of these products to our portfolio will allow us to accelerate growth for both Hormel Foods food service and for Fontanini," Jim Snee, Hormel's chief executive, said in a statement on Thursday.
The business will continue to be run from the Chicago area as a unit of Hormel's refrigerated foods division. Hormel said the new Fontanini plant in McCook has capacity for some of its existing products as well.
"Hormel Foods has an excellent reputation as one of the strongest food companies in the world with a track record of successfully acquiring family-owned businesses like ours," Gene Fontanini, chief executive of Capitol Wholesale Meats, said in the statement.
His father, Oriano Fontanini, started the business in 1960 as a meat shop in a predominantly Italian neighborhood of Chicago. In the 1970s, Gene Fontanini learned the pizza business and steered the family store into becoming a supplier of meats for pizzerias around the Chicago area. They expanded the company in the 1980s with the purchase of a former Swift Eckrich plant in the Chicago stockyards and eventually launched national distribution.
Hormel executives have been growing the company through acquisitions for several years, adding products like Skippy peanut butter, Muscle Milk and Justin's nut butters and candies. Analysts more recently speculated the firm would look for deals in the $400 million to $800 million range.
Edward Jones equity analyst Brittany Weissman said Hormel's move on Fontanini fits nicely within the company's acquisition strategy. The company typically buys smaller, family-owned, protein-focused businesses.
"Normally, food service is a nice diversifier for companies but a lower-margin business. For Hormel, it's a higher-margin business," Weissman said. "As Hormel tries to improve margins in that piece of the business, this will help them get toward their goals. It complements the business well. It's a smaller deal; it's in the protein wheelhouse."
Weissman said Hormel could comfortably take on $3 billion in debt in a much larger acquisition if the company wanted to.
The Austin, Minn.-based company didn't immediately spell out how it would pay for the deal. Justin Scott, analyst at Mizuho Securities USA, wrote in a note to investors this morning that, with more than $500 million cash on hand, the company could pay for it outright and immediately begin to earn profits from it.
Hormel said more information about the deal will become available when the company releases its third quarter earnings Aug. 24. On a day when the markets fell sharply, Hormel's stock closed down 1.4 percent at $33.86.
Staff writer Patrick Thomas contributed to this report.