Q&A With HM Capital’s Andrew Rosen on Earthbound Farm

After yesterday’s post on HM Capital’s investment in organic food business Earthbound Farm, I spoke with HM partner Andrew Rosen for more color on the industry, his firm’s investment thesis and the company’s plans for growth.

To recap, HM Capital invested an undisclosed amount of capital into Earthbound Farm, securing $135 million in debt funding from RBC Capital Markets. The stake size was not disclosed, but HM Capital historically acquires majority positions.

How did HM Capital find the company? What’s attractive about a farming business?

We’ve been investing in food for around 20 years. We’ve done close to $6 billion worth of deal value and across a host of sectors. Food is something that’s core for us. It’s also something we’re very selective about, but we get excited about the sector. Earthbound Farm is by far the market leader within organics. We were looking at the value-added produce sector for going on five years. We’ve been in a dialogue with Earthbound Farm for over 2 years.

If you look at what Earthbound stands for, its organic food. That resonates with consumers and retailers, principally in salads. They got involved with us to tap into our expertise to grow them into other categories while sticking to their mission of providing products to consumers. It’s a product category that’s on-trend with consumers.

Can you explain the business model for me? It appears Earthbound owns the land and outsources the farming to groups of organic farmers, then brands and distributes the products to grocery stores.

They hire a network of growers to farm the land, which is not owned by Earthbound. We’re not in the farming business for the most part. Earthbound contracts the farmers to specifically grow the leafy greens for our needs. In addition, we market and distribute them, along with a host of other kinds of produce items.

I noted yesterday that HM Capital plans to grow the company, in part, through add-on acquisitions. Is the organic farming industry one with many viable acquisition targets?

We do plan to look at acquisition opportunities. The core salad business isn’t exactly ripe for consolidation since we are the largest today. But we can look at other product categories that are organic-it could be within produce or elsewhere. There are a number of organic food companies that could benefit from the sales, marketing and distribution that Earthbound has. Most of the companies (in the organic food industry) are relatively small and have difficulty gaining access to consumers. We will look at those opportunities and also ways to expand Earthbound’s capabilities.

Has the recession caused consumers to trade down away from organic products, which tend to be pricier?

The answer to that really goes back to the fact that the company just celebrated its 25th year anniversary. Over that time, Earthbound has been able to learn the best methods of operation and its grower partners have all gotten better at growing products organically. More times than not there’s an art rather than a science to it, but they’re able to do it very competitively, allowing them to sell products at a comparable price. There is a premium (on the price of Earthbound products) but it’s a small premium.

You mentioned the company has a very strong focus on sustainability and environmentalism. Some people consider eating local food to be an important part that equation, given the economic and environmental impact of transporting food long distances. Is that a problem for Earthbound Farm, since its food is produced in California and Arizona but sold in grocery stores nationwide?

There are always multiple movements in food. There are different trends and local is one. The challenge with organic is that it’s difficult to grow it in many regions other than California and Arizona certain months out of the year. You can grow product elsewhere but it’s difficult to grow organically given pest pressure. People want to eat salad 12 months out of the year instead of two months a year. Earthbound can provide that product to the consumer.

Edited for space.

Previously: HM Capital Buys the (Organic) Farm