IPOs, Mergers and Acquisitions on the Rise for Dietary Supplement, Natural Food Firms


More natural product and nutritional supplement companies are looking to get acquired or go public. What should companies keep in mind?

The natural product and nutritional supplement sectors are growing at their fastest pace since the recession, driven by strong demand across all channels. According to Nutrition Business Journal (NBJ), the natural product and nutritional supplement market grew 10% last year, to $73 billion.

This growth makes natural product and supplement companies increasingly valuable properties in the world of mergers and acquisitions (M&A) and initial public offerings (IPOs). In fact, based on the encouraging results of M&A and IPO activity over the last 18 months, several natural product and nutritional supplement businesses-mostly owned by private-equity investors-are considering going public or putting themselves up for sale.

In this article, we look at some of the notable recent business deals from that period. Additionally, we provide an outlook for which sectors will likely be most active, along with some thoughts on what companies can do to maximize the value of future deals.


Growing Naturally

Before discussing recent and notable deals, let’s first examine the factors driving growth in the natural product and supplement sectors.

Premium natural products are seeing brisk activity once again, as evidenced by last year’s double-digit growth. For one thing, consumers who traded down to more affordable mass-market products during the recession in 2008 have returned with force to premium natural products and nutritional supplements. Even more significant, however, more shoppers are also buying the increasingly large range of natural products in the mass market-evidence of natural products’ mainstream appeal and broader availability. In fact, in June, Natural Foods Merchandiser (NFM) and NBJ data showed 11% sales growth for natural products in the mass-market channel, outpacing the 9% growth of the core natural retailer channel. Improvement in natural product sales contrasts with very low growth of traditional packaged food companies, such as Kraft Foods, Campbell Soup, and Kellogg Co., which are fueling their expansion primarily through price increases.

Based on 2012 sales figures for the year to date, Wall Street analysts forecast an annual growth rate above 10% for the entire sector. Much of this growth is coming from the broader domestic distribution of natural products and nutritional supplements. For food, specifically, leading regional and national food retailers expanded their assortment of products in order to participate in the growth of the industry. In some cases, that was accelerated by the large traditional food companies making acquisitions of smaller natural product companies and selling their specialty products through their distribution systems.


Natural Food Deals

To date, 2012 has marked several significant deals in the natural food space. The March IPO of the natural food brand Annie’s may possibly be the most exciting deal of the year. Shares of the all-natural producer of macaroni and cheese, snack crackers, fruit snacks, and graham crackers were priced at $19 per share, but closed at the end of the first day of trading at nearly $36 per share. Today, the shares sit close to $36.07, with an all-time high of nearly $48.87. (All stock price quotes in this article are current as of November 19, 2012.) The current valuation is approximately 3.9x trailing 12-month (TTM) net sales and over 28.9x TTM earnings before interest, taxes, depreciation, and amortization (EBITDA). In the natural food space, Annie’s ranks as one of the top IPOs in the past five years based on share appreciation in the first three months.

Recent M&A deals in the natural food space include the February acquisition of Food Should Taste Good by General Mills, for an undisclosed amount. General Mills is adding the all-natural snack food maker to its natural and organic products division, Small Planet Foods, which includes the Cascadian Farm, Muir Glen, and Larabar brands. In July, Campbell Soup acquired Bolthouse Farms for $1.6 billion. Bolthouse engages in vegetable farming and produces premium all-natural beverages and dressings. Bolthouse’s implied enterprise value was 2.2x TTM net sales.


Nutritional Supplement Deals

Like the natural food sector, nutrition supplements also continue to deliver strong growth. In 2011, the supplement category grew 8%, according to the aforementioned June NFM/NBJ report, led by meal replacements, diet aids, and inflammation products. Supplements grew faster in the specialty channel (+7%) than in the mass-market channel (+6%). The foundation of the industry continues to be the core segments of multivitamins and traditional supplementation of key ingredients, and there has been a surge in the use of high-protein, ready-to-drink (RTD) beverages, powders, and healthy snack bars. Further, the sector has multiple condition-specific product categories that each exceed $1 billion in annual supplement sales, including joint care (e.g., glucosamine), heart disease (e.g., fish oil), and digestive health (e.g., probiotics), according to the NFM/NBJ report.

Some of this year’s notable nutritional supplement M&A transactions include Pfizer’s acquisition of Alacer Corp., the producer of Emergen-C, in February. Terms for the producer of fruit-flavored, fizzy vitamin drink mixes, multivitamins, and multimineral supplements were undisclosed, but it is believed to have traded at a premium multiple.

Later, in March, Airborne was acquired by Schiff Nutrition for $150 million in cash. The implied enterprise value for the immune-support supplements business was 9.3x TTM EBITDA.

In October, Bayer HealthCare announced an agreement to acquire Schiff Nutrition for $1.2 billion in cash, or over 4x TTM net sales and 27x TTM EBITDA. In November, however, UK-based Reckitt Benckiser trumped Bayer’s bid with a $1.5 billion cash offer, which is equivalent to 5x TTM net sales and 33x TTM EBITDA. At the time this article was published, the offer was subject to entering definitive agreements with Reckitt Benckiser, termination of merger agreement with Bayer, regulatory approvals, antitrust approvals, and shareholder approval. (As of November 20, Bayer said it was not interested in improving its own offer.)

And in June, Procter & Gamble acquired New Chapter for an undisclosed amount. New Chapter produces organic whole-food vitamin, mineral, and herbal supplements.

In addition, in the nutritional ingredients space, Netherlands-based Royal DSM acquired Ocean Nutrition Canada for $530 million in cash, or nearly 3x TTM net sales in July. Ocean Nutrition Canada is a leading producer of omega-3 EPA/DHA ingredients for the dietary supplement and food manufacturing markets.


Opportunities Ahead

For companies looking for future opportunities, the gluten-free sector is among the fastest-growing segments in natural food and supplements and could remain a focus of M&A or IPO deal activity as the market grows. The gluten-free market continues to evolve from a niche sector for consumers diagnosed with celiac disease to a broader mainstream food category in the natural products industry.

Wall Street analysts estimate that the gluten-free category is growing at an approximate 20% annual rate and generated sales in excess of $1.5 billion in 2011. There is reason to think that gluten-free growth will only continue: less than 1% of the U.S. population is currently diagnosed with celiac disease, but many undiagnosed consumers are experiencing the health benefits of a gluten-free diet, which is leading to a jump in the diagnosis rate. Current gluten-free food offerings remain limited, creating an opportunity for well-positioned food producers and retailers.

One only needs to look at recent M&A activity in the gluten-free market to see that the category is showing teeth. In May, Smart Balance announced the acquisition of Udi’s Healthy Foods for $125 million in cash, or over 2x Udi’s TTM net sales. Udi’s is a fast-growing producer of gluten-free bread products. This transaction is transformational for Smart Balance, as it positions the company as a leader in gluten-free, accelerates the company’s growth rate, and further diversifies the company’s product mix toward high-growth natural brands.

Potential sellers in all areas of food, beverage, and supplements hope larger companies aim to acquire the next round of fast-growing, all-natural snack, organic food, and nutritional supplement companies. Also, the success of Annie’s IPO could inspire some larger, private, natural product companies to go public themselves as a way to maximize the value of their companies, rather than seek larger corporate buyers. Without a doubt, sellers have taken note of the valuation Annie’s has achieved and how quickly that valuation grew. It’s a constant reference point in discussions with prospective investors and buyers as a means of indicating the potential value natural brands now hold.


Looking Forward

As evidenced by the deals cited above, acquirers of natural product and nutritional supplement businesses span all areas of the market. These acquirers include large-cap packaged goods companies like Procter & Gamble, consumer healthcare companies such as Pfizer or Abbott Labs, business-to-business nutritional ingredient companies such as Glanbia or Royal DSM, or larger natural brands such as Hain Celestial or Schiff Nutrition. With the growing interest in the natural product and nutritional supplement sectors coming from healthcare companies as well as packaged consumer products businesses, the supply of potential buyers has increased.

While the continued convergence of healthcare and food has created more opportunities for sellers, it has also made the deal landscape much more complex. The strategic positioning of businesses needs to be very thoughtful and yet authentic to businesses’ respective brands.

In order to maximize value, sellers and their advisors need to be well versed in how their business may fit with a larger strategic plan, and need to be convincing in their discussions regarding potential revenue and cost synergies.

Companies considering putting themselves on the M&A market should be prepared for a rigorous process. Core leadership for the deal process should include senior management, a board of directors, and expert financial, legal, and tax advisors. The financial advisor will play a critical role in how a company makes itself attractive to the right buyer. Companies looking for these opportunities should have full financial histories ready, and approach buyers with realistic and detailed views of what they’re worth. Provide prospective buyers with a timetable of key customer contract expirations and new customer and product opportunities, and settle all outstanding legal issues before entering the market. Make sure your real estate appraisals and Phase I reports are current. If you’ve had prospective buyers show interest in the past, provide letters of interest to your financial advisor. Finally, consider retention and sale bonus agreements for key senior executives.


Author’s note: This is not a complete analysis of every material fact regarding any company, industry, or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information in this article was obtained from sources we consider reliable, but we cannot guarantee their accuracy.


Kurt M. Roth is a senior member of the consumer investment banking team at Robert W. Baird & Co. (Baird). Kurt has 15 years of M&A and equity financing transaction experience, and focuses on the food and beverage and consumer wellness sectors. Contact him at kroth@rwbaird.com or at 312/609-4689.


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