Kraft, Hughes Markets Agree to Buy Knudsen

Troubled Knudsen Foods, the largest dairy in the West, was tossed a lifeline Wednesday by Hughes Markets and Kraft Inc., which agreed to buy most of the company’s operations in California and Nevada.

The sale, which must be approved by Bankruptcy Court, would save more than 1,500 jobs and would ensure the survival of the Knudsen and Foremost brand names, well known to generations of Californians for cottage cheese, milk and other dairy products.

“This is a major step forward in our efforts to solve the business problems facing Knudsen,” Chief Executive John P. Brincko said.

Losing $500,000 a Week

Knudsen, which recently has been losing $500,000 a week, has been operating under bankruptcy-law protection since Sept. 17.

Fred McLaren, president of Hughes Markets, said his 41 supermarkets in Los Angeles, Orange and Ventura counties are “one of the major sellers to the public of Knudsen and we think it’s the finest brand in the country. . . .”

“We didn’t want to see the Knudsen name die because we think it’s the finest dairy in the state,” he said.

Tom Herskovits, president of the Kraft Dairy Group, said the purchase would mark Kraft’s first major presence on the West Coast.

“We recognize the difficulties in this complicated financial situation, but believe that Knudsen remains a very strong business that offers some exciting opportunities,” he said.

Terms of the sale were not revealed. But last week, Brincko testified in Bankruptcy Court that Knudsen had received separate bids from Kraft and Hughes for a total of $86 million. The combined Kraft-Hughes offer probably will be somewhat less because the two earlier offers overlapped on what assets the companies wanted to buy.

“There have been lots of (deals) in the works for some time,” said Richard Cotta, executive director of Western United Dairymen, a statewide industry group. “Obviously the sooner it gets done and they get on again the better.”

Knudsen owes dairy producers $36 million, and farmers stopped shipping milk to Knudsen last week after they were told they would not be paid because the beleaguered dairy was nearly out of cash. Milk shipments resumed this week, when Knudsen’s lender, Citicorp Industrial Credit Bank, agreed to give the company enough money to operate through Wednesday.

Knudsen said Wednesday that Citicorp has agreed to provide money for another week of operation. The two companies are still negotiating on financing for an additional three weeks.

Supply Firm

Under the proposed sale, Hughes Markets of Los Angeles will buy Knudsen’s giant milk and ice cream processing plants in downtown Los Angeles. Hughes will supply Kraft of Glenview, Ill., a subsidiary of Dart & Kraft, with sour cream and yogurt from the plants.

In addition, Stater Bros., the Colton-based grocery store chain, has been offered an ownership interest in the downtown plants, Stater Chief Executive Jack Brown said. He declined to say how big Stater’s investment would be.

Hughes also will buy Knudsen’s Fresno, Modesto and Las Vegas plants and distribution centers. Kraft will buy a Knudsen ice cream plant and a frozen ice cream novelty factory in Los Angeles and a plant in Visalia.

When the transaction is completed, Hughes will be processing milk, buttermilk, cream cheese and juice. Kraft will be producing cottage cheese, yogurt, sour cream and ice cream.

Knudsen, which has been laying off employees almost daily, was unable to supply the total number of workers at the plants involved in the sale. But a survey of the facilities and the unions representing employees revealed about 800 employees at the downtown Los Angeles plants and 700 at the plants outside Los Angeles.

Knudsen said it is negotiating to sell other parts of its business but no agreements have been reached.

Plants Closed

Knudsen already has an offer from Leprino Foods of Denver to buy plants at Lemoore, Hughson and Willows, Calif., for $10 million. The Foremost Smithway plant in Los Angeles and a small plant in Tipton, Calif., have been closed.

Brincko testified last week in Bankruptcy Court that Southland Corp. has offered to buy Knudsen’s Hawaii operation for $10 million, plus an infusion of working capital at the close of the acquisition. Southland would also buy inventory and accounts receivable for between $1.5 million and $2 million.

Knudsen has received $10-million and $9-million bids for its Globe Extracts subsidiary, which makes flavorings and food toppings. Knudsen has also received a $90-million offer for its Foremost operations in Texas, Arkansas, Louisiana and Missouri, but that bid is reportedly still tentative.

The dairy has received other offers for some of its operations, which it has not revealed.

Knudsen has 24 processing plants and 40 distribution and other facilities in 10 states, which recently employed 5,000. But the faltering company has recently closed several plants and laid off hundreds of workers.

Fortunes Soured

Knudsen’s fortunes soured when the company tried to grow into a national dairy. Twin brothers Lee and Dee Bangerter and their stepbrother Ted Nelson bought Knudsen in 1983 and then took on even more debt last year when they bought Knudsen’s rival, Foremost Dairies.

Nelson said early this year that he and the company’s other top executives “underestimated the size of the challenge” and had no idea how much cash was needed to run the combined Knudsen and Foremost operations. Production difficulties and a supermarket strike also worked against the company.

Knudsen and its parent, Winn Enterprises, have seen several management changes and board shake-ups. The latest came on Monday, when Brincko was named the sole member of Knudsen’s board. The week before, Winn’s board of trustees was revamped.

Knudsen Creamery was founded in 1919 by Danish immigrant brothers Carl and Thorkild (Tom) Knudsen. The brothers, who owned a dairy consulting firm, had devised a new way to make cottage cheese from skim milk, which dairies then threw away as useless.

Not Involved

The Knudsens took the slogan “The Very Best” and delivered cottage cheese and buttermilk in Tom’s old Ford truck. Knudsen did not begin selling milk until 1935. The Knudsen family is no longer involved in the dairy’s operations.

“I think it (the proposed sale) is a very positive move,” said Brown of Stater Bros., which is one of Knudsen’s biggest customers.

“Certainly the situation is not a happy one, but I think it does offer some opportunities for the future of Knudsen, its customers and its employees,” Brown said. “Oftentimes these things do not have happy endings.”