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.

Supply-Side Memo: Giant Nestle is on the Prowl for Natural, Nutritional, Health and Wellness Food Companies to Acquire

The world's largest food company, Nestle, will soon have $11 billion dollars of cash on hand from its planned sale of 25% of its 77% stake in the U.S. eye care company Alcon, to drug company Novartis. Nestle announced the sale today.

Further, not too long after that, Novartis will acquire the remaining 52% of Nestle's original 77% stake (23% of Alcon isn't owned by Nestle in other words) for a fixed price of $28 billion, making the total purchase price of Nestle's (77%) stake in the U.S. eye care company by Novaris a whopping $39 billion.

Even more interesting to those in the natural products industry is the fact Nestle plans on using a big chuck of those new billions to acquire companies in the natural, healthy, nutritional and wellness food and product's sectors, we've learned.

This acquisition strategy fits well with the food giant's strategic positioning and strategy to become the dominant global corporate force in natural and nutritional foods. In fact, Nestle could use as much as half of the $39 billion, nearly $20 billion, to acquire natural, nutritional and healthy product food companies, we've learned.

In fact, one of our sources who is close to Nestle and thus needs to remain anonymous, told us on Monday Nestle executives have already identified a number of natural and nutritional foods companies which they plan on making acquisition offers to.

Switzerland-based Nestle has positioned itself into the world's foremost nutritional, health and wellness foods company, with top brands in these categories across the board. But it is far from finished. The world's "most admired" food company, as named by Fortune magazine, wants to dominate the nutritional and health and wellness categories globally because it's in these sectors where the company's leaders believe the most future growth will com.

Nestle makes and markets far more than just nutritional, health and wellness category food products of course. [Take a look at the company's brand portfolio here.] However, nutrition, health and wellness are the giant global food and beverage companies fastest-growing categories and where its going in terms of its overall global positioning, as we mentioned above.

Overall, Nestle controls food, grocery and beverage brands, and markets products in the following categories: bottled water (number one globally); baby foods; dairy products (including Hispanic and Asian specialty products); breakfast cereals (including partnering with General Mills outside of North America); and beverages (Nescafe coffee, Libby's fruit juices, Nestea and more, as well as a complete line of Hispanic coffee products).

Other categories include: ice cream (including marketing the frozen treat in China and the Middle East, among other places in the world), chocolate and confectionery (everything from basic chocolate bars to gourmet treats), prepared foods (everything from packaged soups and pasta sauces, to shelf-stable dinner entrees and frozen foods, including numerous specialty, ethnic, gourmet and natural/organic brands), and pet foods and pet care (the Carnation brand and Ralston-Purina brand, along with others.

Lastly, is the nutrition, health and wellness category, which Nestle is growing the fastest of all the above sectors in its consumer packaged goods and beverage group, and plans to use a major portion of the $39 billion from the sale of its 77% stake in Alcon eye care to Novartis to grow even faster by acquiring numerous companies in these categories, which are all related.

Nestle also has a huge global foodservice operation called Nestle Professional, as well as owning 30% of the cosmetics firm L' Oreal.

Look to Nestle for multiple acquisitions of natural, nutritional and health and wellness-oriented food companies in the U.S. as well as globally before 2008 is over.

Despite the global economic slowdown, Nestle believes there's no better time than the present to make major acquisitions to continue growing its nutritional sector. That's the primary reason, along with wanting to pay down some debt, the comapny is selling its 77% stake in eye care company Alcon.

Nestle's acquisition search is going to shake up the scene

There hasn't been much acquisition activity in the natural, health and nutritional foods manufacturing and marketing sector in the last year. With billions in its acquisition bank, Nestle is going to stir things up quite a bit and shake up the currently static M&A scene.

For example, there a number of successful, large and middle-sized natural and nutritional foods companies in the U.S. that are looking to be acquired or merged as they're in need of additional capital in order to get to the next level.

However, since there hasn't been a "big foods guy" like Kraft, General Mills, Heinz or Nestle (all which have made major acquisitions in the sector in the past) out there for a couple years, there's a pent-up demand so to speak in the natural, health and nutrition industry for suitors, in our analysis. Nestle could be that suitor many of these companies are looking for. Stay tuned.

Retail Memo: [Heard on the Street]: Will SuperValu, Inc. Be Supermarket Industry Investor Ron Burkle's Next Play

Ron Burkle, billionaire supermarket industry investor and former bagboy for Southern California's Stater Bros. supermarket chain, is taking a long, serious look at making a major investment in fledgling grocery retailing and wholesaling giant SuperValu, Inc. we've learned.

Burkle, who founded and runs investment firm Yucaipa Companies, LLC and is a close personal friend of former President Bill Clinton (Bill's also an investor in Yucaipa and stands to make about $8 -to- $9 million when he cashes out of one of its funds soon) and a major financial supporter of Hillary Clinton's Presidential campaign, likes what he sees in SuperValu.

What is it he likes? In SuperValu, Inc., Burkle sees a major, multi-banner, multi-format grocery retailer and wholesaler that's stock share price is lower than it should be, has tons of valuable assets, has what looks like a viable turnaround plan, and could benefit from an infusion of cash to help with that restructuring and a large-scale store remodeling program it's in the middle of. SuperValu, Inc. currently has about $44 billion in annual sales.

These are similar attributes, assets and liabilities Burkle has spotted, and liked, in numerous supermarket chains in the past, leading him to invest, acquire, merge, restructure and then sell, making billions as a result.

Burkle's biggest deal with Yucaipa Companies (founded in 1986), which netted him a couple billion dollars of personal profit, began about 20 years ago and involved mutiple acquisitions over an eight year period (1987-1995).

Beginning in 1987, Yucaipa Companies bought Falley's Food-4-Less of Kansas City, Mo. for $35 million. Two years later in 1989 the company acquired long-time Southern California grocery chain Boy's Markets for $375 million. In 1991 Burkle added Alpha Beta, a leading California supermarket chain, to his fast-growing food retailing empire, paying $271 million for the grocery chain.

Then in 1994, the company acquired Phoenix, Arizona-based Smitty's for $138 million. That same year (1994) also saw Burkle making his biggest acquisition to date, the $1.5 billion purchase of Southern California grocery chain Ralph's Grocery Co. He wasn't finished yet though. The following year (1995) Yucaipa Companies acquired Chicago-based supermarket chain Dominick's for $750 million.

Over this eight year period, Burkle and a senior management team operated these various supermarket chains (acquisition-by-acquisition) as an integrated company of sorts, but yet each kept it's own identity, format and positioning in its respective markets. From 1995-1997, Burkle and his team integrated the desperate operations, slashed costs, closed poorly-performing stores, built some new stores, remodeled a number of others, and improved sales and profits as a result.

In 1997, Burkle merged Ralph's/Food-4-Less with Oregon-based Fred Meyer, Inc., creating the number two food retailing company in the Western U.S. after Safeway Stores, Inc. The combined company was named Fred Meyer, Inc.

Then the selling began. In 1998 Burkle broke the Dominick's chain off from Fred Meyer, Inc. and sold it to Safeway Stores, Inc. for $1.85 billion. Yucaipa paid just $750 million for the chain less than three years earlier. Then the BIG DEAL came: Kroger Co. agreed to buy Fred Meyer, Inc. for $8 billion. You can do the math; add up what Burkle paid for all the chains above, then subtract that from $9.85 billion, the combined sale price he fetched for Fred Meyer and Dominicks, and as you can see, he made a tidy profit.

After selling Fred Meyer, Inc. to Kroger Co.--the purchase which made Kroger the number one supermarket chain in the U.S.--Burkle focused primarily on making major investments with Yucaipa, both in and outside of the supermarket industry, rather than acquisitions.

He also nurtured his close friendship with Bill Clinton. In fact, when President Clinton left office after serving his last term, he joined Yucaipa Companies' board of directors at Burkle's invitation. He also became an investor in Burkle's various investment funds--hence the $8 -to $9 million payday the former President is due when he cashes out soon, according to experts who are aware that he plans on doing so.

Burkle's most recent payday came from the acquisition of Wild Oats Markets by Whole Foods Market, Inc., a merger Burkle helped to engineer as the largest private investor in Wild Oats, as well as being its most influencial member of its corporate board of directors.

Burkle netted a couple hundred million dollars from the sale of Wild Oats in September, 2007. That money has been burning a figurative hole in the pockets of the former bagboy, who later became an executive at Stater Bros. in Southern California.

From what we hear, Burkle is close to making a major investment in SuperValu. The grocery chain and wholesaler has been having rough times since the fourth quarter of last year. Sales have been down, although profits have actually been up slightly. The company also has been struggling for well over two years to integrate its huge acqusition of Albertsons, Inc. into its culture and operations. SuperValu's stock share price has been hovering near its all-time lows, which is perhaps its biggest problem, at least in the eyes and investment portfolios of Wall Street.

Just this week however, SuperValu, Inc. CEO Jeff Noodle announced a major restructuring and store remodeling plan that Wall Street analysts might like. Burkle loves to invest large sums of cash and then become a partner with company CEO's and senior executives in restructuring and streamlining operations as a way to increase a company's value. Noddle told investors on January 24 the company is on track to remodel 165 more stores under its "Premium, Fresh and Healthy" format model between now and next year.

At the January 24 investors meeting Noodle also announced additional new initiatives for the company's Sav-a-Lot small-format discount stores and for other parts of its retail operations. He also announced the closing of Supervalu, Inc.'s Sunflower Market stores, a three year-old experimental five-store chain of small-format natural foods stores with an emphasis on low prices.

Such initiatives are music to Burkle's highly-tuned investment ears. We aren't saying the billionaire will make a sizeable investment in SuperValu, Inc. for sure. What we are saying is he's looking very closely and seriously at doing so. Further, if he does make a major investment in the company, look for him to participate in an advisory capacity to Noodle.

SuperValu, Inc. is a huge grocery industry corporation with $44 million in annual sales. As such, Burkle isn't going to gain five or six percent ownership in the company like he did with Wild Oats, which was bought by Whole Foods Market, Inc. for less than $1 billion dollars. However, a cash investment of say $1 billion by Burkle would go a long way right about now in helping SuperValu with it's massive store remodeling program.

Even more important, a Burkle investment would be a positive signal to Wall Street and the company's institutional and private investors and stockholders. In fact, such an investment, especially with Burkle attached to it in some way, would likely give SuperValu, Inc.'s stock a nice per-share boost in the short term. Stay tuned.