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Nestle to Buy Owner of Hot Pockets Brand

August 07, 2002|MELINDA FULMER | TIMES STAFF WRITER

Swiss food giant Nestle said Tuesday that it agreed to acquire the owner of the popular Hot Pockets brand for $2.6 billion in cash, a deal that would give Nestle the top position in the booming hand-held frozen-meals business.

Nestle already owns the two best-selling frozen-food brands, Stouffer's and Lean Cuisine, as well as Ortega frozen Mexican entrees.

The acquisition of Denver-based Chef America, which owns Hot Pockets, Lean Pockets and Croissant Pockets, takes the company into a faster-growing and more lucrative area of the frozen-food business--meals that can be microwaved in a couple of minutes and eaten on the go.

Sales of these products are growing at more than twice the rate of the rest of the frozen-meals business.

"They have a product line in Stouffer's and Lean Cuisine that is not as contemporary as they like," said John McMillin, an analyst with Prudential Financial Research. "It's product your mother eats." Teenagers, he says, are the key consumers of Hot Pockets.

Chef America is just one of a number of high-profile food businesses that are expected to be sold this year as acquisitions in other industries have cooled down. ConAgra Foods' fresh-meats division is being sold, while Hershey Foods Corp. and Pfizer Inc.'s Adams chewing gum division are on the auction block, all with price tags over $1 billion.

Some analysts called the Chef America deal pricey. But many say it's worth it, given how profitable Chef America is, earning a 27% profit margin before interest, taxes, depreciation and amortization. Moreover, tax benefits in the deal will bring the price down to about $2 billion.

"We had been looking at Chef America for 10 or 15 years," said Joe Weller, chief executive of Nestle USA, the company's American division based in Glendale. "We've seen a number of people try and compete with them [in hand-held frozen foods] but not be able to do it."

The key to Chef America's success, analysts say, has been in its ability to turn out a baked product that comes out of the microwave crispy rather than doughy.

With expected sales of about $720 million this year, Chef America controls half of its niche in hand-held entrees.

Nestle has no similar products, other than a single French bread pizza. It expects the Chef America deal to close in the next two months.

Nestle hopes to use its clout with retailers and its global distribution system to bring Hot Pockets, now sold only domestically, into other markets around the globe.

After waiting on the sidelines during the last round of food industry consolidation two years ago, Nestle has been moving quickly to add brands that will make it the leader in a category. In the last nine months, it has invigorated its core businesses, such as ice cream, pet food and frozen foods, making major investments such as December's $11.2-billion purchase of Ralston Purina pet foods, and its pending deal to gain control of Oakland-based Dreyer's Grand Ice Cream. (It completed its acquisition of Haagen-Dazs ice cream last year.)

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