Farmer Bros. to swallow up coffee rival for $45 million

In an effort to jump-start its long-struggling commercial coffee operations, Farmer Bros. Co. has agreed to acquire the Superior Coffee brand and sales network, almost doubling the size of its business.

Both brands are served throughout Southern California in restaurants, mini-marts, hotels and institutional food establishments such as hospitals.

The $45-million purchase from food giant Sara Lee Corp. would give Torrance-based Farmer Bros. annual revenue of about $500 million, a large roasting plant in Houston and a distribution and spice facility in Oklahoma City.

“This is a once-in-a-lifetime opportunity for Farmer Bros.,” said Chief Executive Rocky Laverty, who is working to transform the nearly 100-year-old Southern California coffee roaster from a family-operated business to a national provider.

“In this deal I can take care of 10 years of work very quickly,” Laverty said.

He said the purchase would allow the company to operate in all Lower 48 states instead of just the 31 where it now has business, expanding the reach of its coffee, tea and spice lines, as well as leveraging expenses and operations over a much larger sales network.

“Big chains want national coverage if they are going to do business with Farmer Bros.,” Laverty said.

Sara Lee said earlier this year that it planned to sell the portion of its coffee business that it calls U.S. Direct Store Delivery Foodservice. The division had revenue of $228 million during the 2008 fiscal year. Sara Lee will hold on to its Douwe Egberts and Java Coast brands -- about $400 million worth of business.

But Sara Lee plans to concentrate on selling those brands through large wholesalers and food suppliers rather than maintaining a distributor network itself. Farmer Bros. has an agreement to distribute Egberts coffee to its clients.

“We are simplifying our business. There are a lot of brands out there, and we decided to keep just those two brands,” said Mike Cummins, spokesman for Downers Grove, Ill.-based Sara Lee.

Laverty said the deal would give Farmer Bros. about 20,000 additional customers, 60 sales offices and a fleet of vehicles to serve the expanded business.

In addition to Superior Coffee, Farmer Bros. would pick up the Cain’s, Ireland, Justin Lloyd, McGarvey, Metropolitan, Prebica, Suntipt (U.S. only), Wechsler, Cafe Royal and Royal Kona coffee brands from Sara Lee.

Laverty said the acquisition should start to produce positive cash flow for Farmer Bros. six to 12 months after the closing, expected in the first quarter of next year.

Last month Farmer Bros. reported a fiscal first-quarter loss of $6.1 million compared with a $1-million loss in the same quarter a year earlier. Revenue for the quarter, which ended Sept. 30, increased 9% to $66.5 million.

The losses reflect what the company described as volatility in the green coffee market, higher commodity and fuel prices and significant losses in its investment portfolio.

Shares of Farmer Bros. rose $2.33, or 11%, to $23.39 on Wednesday before the deal with Sara Lee was announced.

Farmer Bros. was established in 1912 as a small Los Angeles coffee roaster and grew steadily during much of the 20th century under the management of Roy F. Farmer, son of the founder. But the company stalled in recent decades after failing to adjust to competition from specialty coffee sellers such as Starbucks Corp. and Peet’s Coffee & Tea.

Farmer was known for his passionate devotion to the company and autocratic style, which on occasion landed him in trouble with outside shareholders and even relatives. He once tried to keep his sister, Catherine Crowe, off the board of directors, sparking a decades-long family feud that ended only after the company bought out the interests of the Crowe family for $111 million five years ago.

He kept control of the business until his death at age 87 in 2004. Leadership of the company briefly passed to his son Roy E. Farmer, but he committed suicide in January 2005 at age 52.

Succession passed to a series of non-family members. Laverty’s previous jobs include a two-year stint as president and CEO of Diedrich Coffee Inc., a specialty coffee roaster, and 19 years in executive posts at Smart & Final Inc., a Los Angeles-based food retailer. He became CEO of Farmer Bros. a year ago.

The Farmer family continues to own 40% of the company, an employee stock ownership plan controls 18%, and Franklin Mutual Advisors owns more than 10%, leaving only a portion of the company’s shares available for public trading.

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