Suiza Foods Corporation
Suiza Foods Corporation
Incorporated: 1988 as Kaminski/Engles Capital Corp.
Sales: $1.80 billion (1997)
Stock Exchanges: New York
Ticker Symbol: SZA
SICs: 6719 Offices of Holding Companies, Not Elsewhere Classified; 2023 Dry, Condensed & Evaporated Milk Products; 2024 Ice Cream & Frozen Desserts; 2026 Fluid Milk; 2086 Bottled & Canned Soft Drinks & Carbonated Waters; 2095 Roasted Coffee; 2099 Food Preparations, Not Elsewhere Classified; 3085 Plastic Bottles; 3089 Plastic Products, Not Elsewhere Classified
Suiza Foods Corporation has seemingly come out of nowhere to become one of the leading fresh milk and dairy food companies in the United States. The trade magazine Dairy Foods ranked Suiza as the number four dairy company as of year-end 1997 (behind Kraft Foods, Land O’Lakes Inc., and Dean Foods Corp.), moving up from the number 19 position in only one year. The company’s spectacular growth—revenues increased from $341 million in 1993 to a forecasted $3.4 billion in 1998—has been fueled by an aggressive program of acquisition through which it is serving (along with Dean Foods) as a major consolidator of the dairy industry. Just since its initial public offering in April 1996, Suiza Foods has completed more than 40 acquisitions. Most of the companies purchased have been milk processing concerns, but Suiza has also added operations involved in fruit drinks, coffee, juices, yogurt, packaged ice cream, ice cream novelties, and bottled water. The company’s brands are primarily of the regional variety, with nationally known brands including International Delight (gourmet coffee creamers), Second Nature (egg substitute), Naturally Yours (sour cream), Mocha Mix (non-dairy creamer), and Coffee Rich, Farm Rich, and Poly Rich (creamers). In addition to its involvement in various food sectors, the company has quickly gained a leading position in the consumer goods plastic packaging industry, with an emphasis on containers used for milk, water, and other beverage products. About 70 percent of company revenues are derived from dairy operations, with the remainder from packaging. Suiza Foods Corporation is essentially a holding company for its various subsidiary operations. The company also holds a 12 percent stake in Boulder, Colorado-based Horizon Organic Dairy Inc., the largest producer of organic dairy products in the United States.
Packaged Ice Beginnings
Suiza Foods had its start in 1988 when an investment firm, Kaminski/Engles Capital Corp., formed by Gregg L. Engles and Robert Kaminski purchased the Reddy Ice packaged ice business from The Southland Corporation, owner of the 7-Eleven convenience store chain, for $26 million. It was ironic that Reddy Ice would be the company that Suiza Foods was founded upon, since Southland also traced its beginnings to Reddy Ice, which was launched in 1927 by 7-Eleven founder Joe C. Thompson. By the late 1980s, Southland had fallen on hard times, and the selling of its ice business was part of a divestiture program. Later in 1988 Kaminski/Engles bought Sparkle Ice from The Circle K Company, another convenience store chain, and combined it into Reddy Ice. Over the next several years, more than a dozen additional ice making and distribution operations were purchased and melded into Reddy Ice, creating abundant opportunities for consolidating facilities and achieving economies of scale. This pattern would be followed to an even larger extent by Engles in the dairy sector.
Engles’s background was in investment banking, but he specialized in mergers and acquisitions, which was quickly apparent. In late 1993 Engles and a group of partners in Suiza Holdings L.P. acquired Suiza-Puerto Rico for $99.4 million, including $85 million in cash. Suiza-Puerto Rico’s operations included Suiza Dairy Corp., the largest dairy company in Puerto Rico. Suiza Dairy (“Suiza” is Spanish for “Swiss”) had been founded in 1942 by Héctor Nevares, Sr., and was owned by the Nevares family until the purchase by the Engles-led partnership. The company held 58 percent of the milk market on the island, had 850 employees, and generated annual revenues of $185 million. Suiza-Puerto Rico was also involved in the manufacture of fruit drinks and the distribution of third party brand name ice cream and other dairy products.
The dairy sector quickly became Engles’s industry of choice. He had been searching for an area ripe for consolidation. In 1998, in explaining to Dairy Foods why he chose dairy, he said: “In large measure, because that’s the opportunity that presented itself. I don’t know of a bigger industry consolidation going on today. But I like dairy. It’s dynamics are good. This industry is one in which there are real economic benefits in size and scale, but no one really has it, no one has capitalized on that.” The U.S. dairy industry of the 1990s was highly fragmented, with numerous family-owned operations that were ideal acquisitions candidates.
Engles’s formula for growth was evident right from his first foray into dairy (and actually was earlier applied to ice packaging). His plan was to purchase the leading dairy in a region, then fill in with additional acquisitions in that region. By consolidating operations, closing plants, and cutting jobs, the first dairy acquired would gain market share, increase its efficiency, and become more profitable. In Puerto Rico, Engles followed his purchase of Suiza Dairy with the June 1994 $7 million acquisition of Mayaguez Dairy, Inc., the island’s number three dairy. Mayaguez was subsequently consolidated into Suiza Dairy, whose market share increased to 66 percent, and the plan was put into practice.
In April 1994 Engles, through his Dallas-based investment banking firm Engles Management Corp., spent $48 million to acquire Lakeland, Florida-based Velda Farms, Inc., providing a regional base for the state of Florida. Velda Farms, which was founded in 1955, manufactured and distributed fresh milk, ice cream, and related products under its own brand names to about 9,500 food service accounts, convenience stores, club stores, and schools.
Suiza Foods Formed in October 1994
Engles incorporated Suiza Foods Corporation in October 1994 as a holding company for Suiza-Puerto Rico, Velda Farms, and Reddy Ice. Engles was named chairman and CEO, while Cletes O. “Tex” Beshears—Engles’s right-hand man—was named president and chief operating officer as well as a director. Beshears had been a vice-president at Southland and COO of its dairy group from 1980 to 1988. From 1965 to 1980 Beshears was division manager for a number of Southland’s regional dairy operations, including Velda Farms. The headquarters for Suiza Foods were established in Dallas.
Suiza Foods was set up as a holding company, with a thoroughly decentralized management style. As with its previous acquisitions, the Suiza plan was to seek out companies with strong management teams that could be left in place for a smooth transition and the retention of local market experience, relationships, and knowledge. By and large, the company had no plans for creating national brands, concluding that the continuation of longstanding local and regional brands was critical for success in the dairy industry.
The newly formed corporation immediately set out on the acquisition trail. In November 1994 Velda Farms added to its dairy operations the Florida division of Flav-O-Rich Inc., which was purchased from Mid-American Dairymen, Inc. for $3.6 million. Similarly, Velda bought Skinner’s Dairy Inc. of Jacksonville, Florida, in January 1996.
To help fund additional acquisitions and pay down debt, Suiza Foods went public in April 1996 through an initial public offering—priced at $14 per share—that raised about $48.6 million. Company stock was traded on the NASDAQ stock exchange under the symbol SWZA. An additional $10 million was secured in August 1996 through a private placement of common stock to the T. Rowe Price Small Cap Value Fund. Then in January of the following year Suiza raised another $89 million through a secondary public offering, priced at $22 per share. Proceeds were again used to reduce debt. In March 1997 Suiza Foods began trading on the New York Stock Exchange under the symbol SZA. Company stock ended 1997 trading at $59.56 per share, after reaching a high of $62.50.
Suiza Foods Corporation is a leading manufacturer and distributor of fresh milk and related dairy products, shelf-stable and refrigerated food and beverage products, frozen food products, coffee, and plastic containers. The Company’s products are distributed throughout the United States, Puerto Rico, and many foreign countries. Through aggressive acquisition, consolidation, and operation of numerous regional and national companies, Suiza has become a major force in the food, beverage, and packaging industries.
Suiza strives to manufacture and distribute products that are an integral part of consumers’ lives; to constantly delight consumers and customers with the quality, value, and innovative nature of its products; and to responsibly increase value for its shareholders.
Meanwhile, in July 1996 Suiza acquired Garrido y Com-pania, Inc., the second largest coffee processor in Puerto Rico and operator of the island’s largest office and hotel coffee service. The company paid $35.8 million for Garrido, which became part of Suiza-Puerto Rico. In September 1996 Suiza gained a regional milk producer in southern California through the $55.1 million acquisition of Swiss Dairy Corp., based in Riverside. The family owned and operated dairy was founded in the 1940s and had sales of about $126 million in 1995. Suiza Foods added another western dairy to its growing stable in December 1996 when it paid $27 million for Model Dairy, also family owned and operated since opening in 1906. Reno, Nevada-based Model Dairy was the largest milk distributor in northern Nevada. These acquisitions helped increase Suiza Foods’ revenues from $431 million in 1995 to $521 million in 1996.
Acquisition Pace Quickened Starting in 1997
In July 1997 Beshears was named vice-chairman of Suiza and William P. “Bill” Brick added the post of president to his title as COO (which he had assumed from Beshears in October 1996). Brick, like Beshears, had experience in the dairy industry prior to joining Suiza in July 1996 as an executive vice president.
During the later months of 1997 and all of 1998 Suiza Foods grabbed headlines with its ever-more acquisitive methods. In the second half of 1997 alone, the company acquired Dairy Fresh L.P. (renamed Dairy Fresh, Inc.) for $106.3 million (in July); Garelick Farms, Inc. for $299.6 million (also in July); the Nashville, Tennessee, dairy division of Fleming Companies, Inc. (in August); Country Fresh, Inc. for $135 million in stock and debt (in October); and The Morningstar Group, Inc. for $960 million in stock and debt (in November). Winston-Salem, North Carolina-based Dairy Fresh generated about $125 million in annual revenues through the processing of milk and ice cream products. The Fleming dairy division, which Suiza renamed Country Delite Farms, Inc., had revenues of $76 million. In February 1998 Suiza paid $248 million for Land-O-Sun Dairies, L.L.C., a Johnson City, Tennessee, processor of fluid milk and ice cream with revenues of $464 million. Dairy Fresh, Country Delite, and Land-O-Sun together formed the largest dairy manufacturing and distribution network in the Southeast.
Garelick Farms included three dairy companies in the Northeast—Franklin, Massachusetts-based Garelick, Fairdale Farms, Inc. in Bennington, Vermont, and Grant’s Dairy, Inc. of Bangor, Maine—in addition to Mendon, Massachusetts-based bottled water firm Miscoe Springs, Inc. Garelick’s operations also included 17 plastic bottle manufacturing operations located from Maine to Texas, which Suiza consolidated within a new subsidiary, Franklin Plastics, Inc. Collectively, the Garelick operations generated more than $370 million in revenues and provided Suiza a solid base for growth in the Northeast.
The acquisition of Country Fresh provided Suiza its first penetration of the Midwestern market. Based in Grand Rapids, Michigan, Country Fresh was a processor of milk, juice, and ice cream products, which it distributed in Michigan, Ohio, and Indiana. The company had annual revenues of $353 million. In early 1998 Suiza expanded its presence in the Midwest through the February acquisition of Oberlin Farms Dairy, Inc. of Cleveland, Ohio, and the March purchase of Louis Trauth Dairy, Inc., of Newport, Kentucky. Oberlin had revenues of $76 million, while Louis Trauth had sales of $67 million.
The merger—through a stock swap—with Morningstar was different in that it diversified Suiza’s operations. Morningstar’s history paralleled that of Suiza Foods. It, too, was born in 1988 through a Southland divestment. Since being sold that year to private investors, Morningstar had grown through acquisitions and become a publicly traded company (just as Suiza had). It had revenues of about $528 million through its manufacturing and distribution of branded and long shelf life dairy and non-dairy specialty foods. Morningstar’s array of brands included International Delight gourmet coffee creamers, Second Nature no-cholesterol egg substitute, Naturally Yours sour cream, Mocha Mix nondairy creamer, and Jon Donaire cheesecakes and desserts. The company also licensed the Lactaid brand for a line of lactose-free and lactose-reduced dairy products, as well as supplied its customers with private label creamers, cottage cheese, prewhipped toppings, sour cream, and yogurt.
As a result of its aggressive acquisition strategy, Suiza Foods more than tripled its revenues for 1997, posting net sales of $1.8 billion. The company reported net income of $28.8 million. It now laid claim to the top position in U.S. dairy products, although Dean Foods also boasted that it was number one.
Following the merger with Morningstar, Suiza shuffled its top management. Brick shifted over to become executive vice-president and president of the dairy group, making room for L. Hollis Jones to become president and COO, the position he had held at Morningstar. Jones, however, left Suiza in February 1998, becoming an exclusive consultant for Suiza, with a focus on acquisitions and strategic developments. Taking over as president and COO was G. Irwin Gordon, who had been a Suiza executive vice-president.
Acquired Continental Can in 1998
Suiza Foods’ acquisition of Garelick Farms—more specifically Franklin Plastics—had presented the company with another opportunity. Up until that purchase, Suiza was involved in the plastic packaging industry only through those dairies it had acquired that made their own containers (such as Neva Plastics, which was acquired along with Suiza-Puerto Rico). Franklin Plastics, however, served outside customers as well. Suiza decided to build upon the expertise of Franklin by applying its consolidation strategy to plastic packaging. In an acquisition announced in January 1998 and consummated in June of that year, Suiza acquired Continental Can Company, Inc. for about $345 million. Norwalk, Connecticut-based Continental Can had revenues of $546 million and 15 plastic packaging plants in the United States, which when added to those of Franklin provided Suiza with a nationwide packaging network. Continental Can also had nine European plants that manufactured food cans and plastic packaging, and it was possible that these operations would eventually be divested. Suiza was also considering an eventual public offering of a minority interest in its packaging operations to improve its already strong financial state.
In March 1998 the company’s board of directors adopted a shareholders’ rights plan aimed at making a hostile takeover of Suiza more difficult. Two months later Suiza completed the sale of Reddy Ice—the business upon which the company was founded—to privately held Packaged Ice, Inc. of Houston, Texas, for $172 million. The move was intended to allow the company to focus on its core dairy and plastic packaging operations, with the proceeds slated for additional acquisitions in those sectors. In a somewhat similar move, Suiza in July 1998 exchanged its Jon Donaire desserts business for the retail refrigerated and frozen creamer business of Rich Products Corporation of Buffalo, New York. While desserts were outside Suiza’s core food areas, the Coffee Rich, Farm Rich, Poly Rich, and Rich Whip brands acquired fit in perfectly with the other brands Suiza had acquired through Morningstar.
Suiza Foods added two more dairies to its northeastern region in 1998 by way of the June purchase of West Lynn Creamery, Inc., which had revenues of $215 million; and the August acquisition of the fluid dairy division of Cumberland Farms, Inc. of Canton, Massachusetts, which generated sales of about $200 million. In July 1998 Suiza spent about $12 million for a 12 percent stake in Boulder, Colorado-based Horizon Organic Dairy Inc., holder of 65 percent of the U.S. organic dairy product market. The transaction was made in concurrence with Horizon’s initial public offering. Horizon also entered into dairy processing and distribution agreements with Suiza subsidiaries Model Dairy and Garelick Farms. Suiza Foods topped off 1998 with the December purchase of Broughton Foods Corporation for $123 million. Based in Marietta, Ohio, Broughton was a leading manufacturer and distributor of milk, ice cream, and other dairy products in Michigan, Ohio, West Virginia, Kentucky, Tennessee, and sections of the eastern United States. The company had revenues of about $200 million in 1997. Suiza planned to integrate Broughton facilities into its regional operations in the Midwest and Southeast. With its various 1998 acquisitions, Suiza was expected to post 1998 revenues of more than $3.4 billion, nearly double that of the preceding year.
As a new century approached, Suiza Foods was likely to continue building upon its dairy manufacturing and distribution network through major acquisitions in new regions and fill-in purchases in existing regions; as well as seek out additional opportunities to expand its product offerings—consumer branded, value-added, and private label—in all areas of the dairy case. Further acquisitions were also expected to beef up Suiza’s plastics packaging operations. The company held more than 10 percent of the $25 billion fluid milk market in the United States, and Engles aimed to increase that figure to 30 percent by 2003. During that period, Engles believed a dominant, $5-$7 billion U.S. dairy company would emerge—and he was working to make sure it was Suiza Foods.
Broughton Foods Company; Continental Can Company, Inc.; Country Delite Farms, Inc.; Country Fresh, Inc.; Dairy Fresh, Inc.; Fairdale Farms, Inc.; Franklin Plastics, Inc.; Garelick Farms, Inc.; Garrido y Compania, Inc.; Grant’s Dairy, Inc.; Land-O-Sun Dairies, L.L.C.; Louis Trauth Dairy, Inc.; Miscoe Springs, Inc.; Model Dairy, Inc.; The Morningstar Group, Inc.; Neva Plastics Manufacturing Corp.; Oberlin Farms Dairy, Inc.; Suiza Capital Trust; Suiza Dairy Corporation; Suiza Fruit Corporation; Suiza Management Corporation; Swiss Dairy Corporation; Velda Farms, Inc.; West Lynn Creamery, Inc.
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—David E. Salamie