HM Capital Buys The (Organic) Farm

Target: Earthbound Farm

Sponsor: HM Capital Partners

Debt Provider: RBC Capital Markets

The latest deal from HM Capital Partners shows the firm wants consumers to have their organic produce and be able to afford it too.

The Dallas-based firm has made an undisclosed investment in Earthbound Farm, a San Juan Bautista, Calif.-based provider of organic fruits and vegetables. The company is known for producing pre-packaged organic salads that it says tap into consumers’ desire to buy organic at only a small price premium compared to non-organic offerings.

As part of the transaction, Earthbound Farm secured $135 million in debt funding from RBC Capital Markets, a sum that totals around 1.9x to 2.9x leverage, according to reports published by two debt providers. The facility has a spread of 550 basis points and a 3 percent LIBOR floor.

HM Capital joins the business’s existing partners, growers Mission Ranch and Tanimura & Antle, as well as founders Drew and Myra Goodman, as shareholders. The company’s President Charles Sweat will assume the role of CEO. The size of HM Capital’s stake was not disclosed, but HM Capital has historically made majority investments.

HM Capital Partner Andrew Rosen said Earthbound Farm is able to keep its prices competitive with non-organic competitors because the company has honed its best practices and farming methods over its 25-year life. During that time, Earthbound Farm grew from a 2.5-acre operation to more than 33,999 acres of farmland. The company operates its farms through the partnership of 150 farmers.

HM Capital plans to help the company grow via add-on acquisitions of other organic food companies. Earthbound Farm is the largest player in organic salads, and the company could look to expand into other organic offerings. “There are a number of organic food companies that could benefit from the sales, marketing and distribution that Earthbound has,” Rosen said. “Most of the companies (in the organic food industry) are relatively small and have difficulty gaining access to consumers,” he added.

The firm sees the food and beverage sector as core to its investment strategy. Rosen said HM Capital has been in a dialogue with Earthbound Farm for two years, after looking at the value-added produce sector for around five. Prior to this deal, the firm purchased Sturm Foods, a Wisconsin-based maker of nutritional drink mixes, hot cereals and other dry mix products in 2005. The firm also owns Advanced H20, a private label bottled water business. In 2007, the firm sold Swift & Co., a producer of beer and pork products, to a Brazilian company for $1.5 billion.

Few other buyout firms have jumped on the organic food products bandwagon. In 2007, Phoenix Equity Partners invested in U.K. organic farm Abel & Cole. Also, in early July, turnaround firm Pegasus Capital purchased a 51 percent stake in Hain Pure Protein, a producer of natural, organic and antibiotic-free chicken and turkey products.

HM Capital made the investment from its HM Capital Sector Performance Fund, a $780 million pool raised in 2008. The fund is HM Capital’s first fund since re-branding itself after having raised and deployed five U.S-focused funds and three international funds as Hicks, Muse, Tate & Furst Inc. In addition to food and beverage deals, the firm targets investments in the media and energy sectors.