UPDATE: Feb. 21, 2019: Hormel announced in an earnings report that the company sold its CytoSport business to Pepsi for $465 million in cash.
- Hormel Foods is selling its CytoSport business to PepsiCo for an undisclosed amount, according to a release. CytoSport makes protein powders, shakes and bars under its Muscle Milk and Evolve Protein brands.
- The deal is expected to be completed in the next two months. More details about the acquisition will be unveiled in Hormel's earnings call on Feb. 21, the company said.
- Jim Snee, chairman of the board, president and CEO at Hormel Foods, said Pepsi's experience in the nutrition category and long-standing distribution partnership for CytoSport and the Muscle Milk brand puts them in "strong position" to grow the business.
After five years with the brands, Hormel is shedding the Muscle Milk maker from its portfolio. Hormel purchased CytoSport in 2014 for $450 million. The deal was seen as a way for the meat processor to get into the non-meat protein market, which has continued to be a growing space with increasing consumer interest. Now Pepsi wants in.
CytoSport started out its business selling protein powders in 1998 before making ready-to-drink bottled protein products. Since then, CytoSport has grown substantially. Under Hormel, the brand launched Evolve, a line of plant-based protein shakes, powders and bars. The plant-based protein market is expected to continue to see growth, so this new line could help boost Pepsi's portfolio.
But Cytosport has faced hurdles in recent years. The manufacturer that bottled Muscle Milk products announced a voluntary recall in 2016 over a packaging issue that hurt the company's profit. Although the brand recovered from that blunder and Hormel beat income expectations in its most recent quarter, its CytoSport business just incurred a $17 million impairment cost and saw a poor financial performance overall.
"CytoSport had a disappointing year with declines in powder and single serve ready to drink product lines," Jim Sheehan, the company's senior vice president and chief financial officer, said in an earnings call at the end of last year.
Pepsi will be looking to boost CytoSport's brands as it integrates the segment into its portfolio. As soda sales have been slumping across the industry, Pepsi has struggled to boost its bottom line and most recently lowered its 2019 expectations. The company could be looking to diversify its portfolio with this acquisition and grow more in the popular protein and sports drink market. Pepsi already makes protein shakes with its Gatorade products so these brands could fit better in its existing portfolio than they did in Hormel's.
"Transition should be relatively quick for both parties, as Pepsi already distributes the product in its core RTD channels," Mizuho Restaurant and Proteins analyst Jeremy Scott said in a statement emailed to Food Dive.
This is one of the first acquisitions in the tenure of Pepsi's new CEO Ramon Laguarta, who took over the company last year. Under former CEO Indra Nooyi, Pepsi acquired several companies, including SodaStream International for $3.2 billion and baked fruit and vegetable snack maker Bare Foods. This move could come as a surprise to those closely following the company since executives recently said they didn't have immediate plans for big acquisitions.
"We believe our product and geographic portfolios make sense. And we do not currently see the need to shed or acquire businesses in any significant way," Ramon Laguarta, Pepsi's CEO, said in an earnings call last week.
But Pepsi's CFO Hugh Johnston also told CNBC last week that any transactions will probably be less than $500 million. This latest transaction fits that expectation since the company paid $465 million, about $15 million more than Hormel shelled out in 2014.
A spokesperson at Pepsi told Food Dive in an emailed statement that the deal is "consistent with our tuck-in acquisition strategy."
"This transaction is yet another example of ways we are building a consumer-centric portfolio of brands that offer a breadth of options across convenient foods and beverages," the spokesperson said.
Despite CytoSport's difficulties under Hormel, Pepsi has more experience with these kinds of beverages and if the company can turn the brands around, then the protein drinks and powders could help diversify the company's portfolio and boost its bottom line.