Monday, May 5, 2008

Retail Memo: Trouble in Paradise: Canada's Planet Organic Health Corp. Backs Out of Deal to Acquire Santa Cruz, CA New Leaf Community Markets

Located on the North-Central cost of California, Santa Cruz, is a post card-picture paradise of sorts.

With its numerous sandy beaches, sunshine throughout the summer, its classic beach and boardwalk with amusement rides, and a quaint downtown lined with cafes, bookstores and restaurants, Santa Cruz is just the place one would think the principles of a natural foods retail company from chilly Canada would want to visit frequently in order to "do store checks" in their coastal California region natural foods stores.

The coastal city also is home to a campus of the University of California with an ocean view, as well as being a short drive from famous Monterey, Pebble Beach and Carmel.
But for the executive team of Canada's Planet Organic Health Corp. and Planet Organic Markets, that's not going to be the case.

As Natural~Specialty Foods Memo was one of the first publications to report earlier this year on February 17, Canada-based Planet Organic Health Corp., which operates Planet Organic Markets banner natural foods stores, other natural products retail stores and a vitamin and supplements company in its home country, had agreed in principle earlier this year to acquire Santa Cruz, California multi-store independent natural foods retailer New Leaf Community Markets for $9.8 million.

However, we've learned the acquisition will not be going through. The reason: Planet Organic Health Corp. has decided to withdraw a planned $15 million new common stock offering due to what it says are week market conditions at present.

Apparently, the natural products company needed a portion of that $15 million (the $9.8 purchasing price of New Leaf Community Markets) to pay for the acquisition.

Darren Krissie, Planet Organic Health Corp.'s chief financial officer, says the company is "doing well and will continue to grow," but that it can't acquire New Leaf Community markets without the new $15 million stock offering, so therefore can't do the deal.

We had talked to both companies earlier this year when we reported the acquisition. All the principles seemed certain it would happen. The deal was supposed to be finalized on April 31.

New Leaf Community Markets has five natural foods stores under the New Leaf banner in the Santa Cruz area. Under the deal with Planet Organic, the Canadian company was to acquire three of the existing five stores, plus the new Half Moon Bay store and another new store set to be built on the westside of the city of Santa Cruz. Planet Organic would also acquire the company.

The reason it wouldn't acquire the other two stores--one in nearby Felton and the other in nearby Boulder Creek--is because they're owned by a independent operator who licenses the New Leaf name from the company. That owner, Bob Locatelli, plans to continue operating those two stores under the New Leaf banner, he says.

You can read a fact sheet New Leaf Community Markets put together earlier this year for its customers about the Planet Organic Health Corp. acquisition here. It further explains the relationship with Locatelli as well.

To announce the deal earlier this year, Planet Organic's CEO and CFO Krissie spent a couple days in Santa Cruz with New Leaf Community Markets co-owner and president Scott Roseman. They even all held a press conference and photo-op session together where all spoke with certainty about the acquisition, even detailing how Roseman would remain in charge and how Planet Organic would infuse new money into the operation, including for the new New Leaf store currently being built in the nearby coastal city of Half Moon Bay.

New Leaf's Roseman says he is "disappointed about a lost opportunity with a retailing organization (Planet Organic) with similar values," but that New Leaf Community Markets is in healthy financial condition and will move forward with its new projects, including completing and opening the new Half Moon Bay store.

Other plans Planet Organic and Roseman discussed in the press conference earlier this year included building a new, large New Leaf natural foods store on the westside in Santa Cruz where there currently is an existing New Leaf store, as we mentioned above.

Roseman says both the completion of the Half Moon Bay store, which the company is currently hiring staff for, and the future plans to build the new Santa Cruz-Westside store, are still a go.

We aren't so sure however. When New Leaf Community Markets and Planet Organic Health Corp. jointly announced the acquisition/merger together, Roseman said one of the main reasons for doing so is because New Leaf needed the new infusion of capital to open its Half Moon Bay store, build the new Santa Cruz-Westside natural foods market, and to remodel at least one of its current, existing stores, which likely is its downtown Santa Cruz market.

The $9.8 million from the acquisition by Planet Organic would have gone a long way towards meeting these three goals.

Without that cash infusion, we can't help but believe New Leaf is going to have a tough time not only getting the new Half Moon Bay store up and running properly, but it's likely in our analysis the natural foods retailer will either have to find some cash or put off building the new Santa Cruz-Westside store and remodeling the existing store, as it had planned.

The economy in Northern California could be better, and Whole Foods Market is making a push into New Leaf's market area with its huge supernatural foods stores as well. It's a tough time for any retailer in the region.

The Planet Organic acquisition was going to infuse New Leaf not only with the initial $9.8 million in cash, but the Canadian natural products' company also had said it planned to provide additional capital to grow the natural foods retailer.

Last year, as part of its strategy to enter the U.S. natural foods retailing market from its base in Canada, Planet Organic acquired the 11-store Mrs. Green's Natural Foods chain in upstate New York. As we reported here on April 16, Planet Organic recently said it plans to spend $1 million to build a new fresh, prepared foods facility to serve the 11 Mrs. Green's natural foods stores.

The Mrs. Green's stores have a popular fresh, prepared foods offering. However, all of the prepared foods for the deli and bakeries are currently being produced in a crapped basement kitchen below on of the stores. The new facility is designed to replace that basement kitchen, as well as to allow the natural foods retailer to expand the quantity and variety of prepared foods' items it produces for sale in the 11 stores.

We don't know if the prepared foods facility expansion will be delayed or postponed because of Planet Organic Health Corp.'s decision to remove its $15 million new stock offering from the market.

The New Leaf Community Markets' acquisition was to be the second leg of Planet Organic's entry into the U.S. natural foods retailing market. The idea being to acquire an existing multi-store retailer in the eastern region of the U.S. (Mrs. Green's) and on the west coast (New Leaf Community Markets). These two regions are the strongest per-capita natural foods retailing markets in the USA.

From there, Planet organic planned to open additional Mrs. Green's and New Leaf stores, as well as scout for other similar sized multi-store operators for possible acquisition.

This USA strategy is obviously on hold now, since the $15 million dollar new stock offering was key to it. However, we expect Planet Organic Health Corp. to float the offering, or one of a similar amount, when the stock market conditions in Canada and the U.S. improve. From everything we have observed, the company wants to continue its rapid growth.

However, whenever that time comes will be too late for Santa Cruz-based New Leaf Community Markets.

If the retailer is well financed as it says, there should be no problems. However, if that's not the case, there are other potential suitors out there in terms of acquisitions and mergers. We see Sunflower Farmers Markets and Sprouts Farmers Markets as two potential, fast-growing natural foods chains which might be interested in New Leaf.

Both retailers have recent infusions of cash and are building numerous new stores in the Western U.S. Sprouts currently has a couple of stores in Southern California but none in Northern California. It also has stores in Arizona and elsewhere in the Western U.S.

Sunflower Farmers Markets has stores in Colorado, Arizona and New Mexico, but none in California. Both Sunflower and Sprouts are planning to open stores in Texas as well, either later this year or early next year.

New Leaf, with its long history in Santa Cruz and strong local community support, could be a could move for either of these natural foods retailers.

Then, of course, there's Whole Foods Market. Even though the existing New Leaf stores are smaller than Whole Foods' new stores, it has in the past acquired similar natural products retailers in California, both as an entry into a particular region, as well as to merely eliminate them as competition.

Regardless if New Leaf remains independent or looks for a suitor, we see numerous opportunities out there for the natural foods' retailer, even in these less than strong economic times.

Meanwhile, pulling out of the deal will be a setback for Planet Organic in terms of its U.S. natural foods' retailing strategy. New Leaf Community Markets offered itself as a nice bookend to the Mrs. Green's acquisition in New York.

Since such bookends in the form of small-chain, multi-store natural foods retailers which have strong local community support like New Leaf Community Markets has, aren't easy to find, it could be some time before Planet Organic finds such a good west coast retail yang (New Leaf) to its east coast retail yin (Mrs. Green's), even if it has the cash in hand.

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