As most people predicted, 2001 brought tough times to the nutrition industry. Amidst slumping company valuations and transaction activity, the big question is, "When will the industry recover?" Based on the activity in a few key sectors, the answer may be "soon."
The retail sector saw few transactions in 2001—only seven deals were announced—but the story behind the deals is a bit more complex.
The buyout of Canada's National Health Stores franchisees was 2001's most notable deal. The company's decision to no longer franchise its health stores was based on the broader opportunity it saw in recasting the stores under its Spartan Nutrition brand. At the same time, Whole Foods Market and Wild Oats Markets experienced increasing same-store sales that spurred investments in new stores and acquisitions in the third quarter. Finally, Cetalon, the Canadian operator of health and nutrition stores in Sears department stores, brought its concept south to the States.
The number of merger and acquisition transactions last year fell 25 percent compared with 2000. Most of last year's acquirers bottom-fished to take advantage of low valuations, which were nearly half of a company's sales, or three to five times earnings. Some of the more traditional acquirers were again the most active in this sector—NBTY Inc. bought the NatureSmart division of Whole Foods for $28 million in cash. The supplement maker, formerly known as Amrion, was acquired by Whole Foods in 1997 in an all-stock deal valued at $150 million. Whole Foods' strategic decision to refocus on retailing seems to be paying off; it just reported record results in its FY02 Q2. Another notable deal involved Goldshield, the UK-based supplements manufacturer which acquired the well-known PR*Nutrition and Changes Int'l. brands from Twinlab for $5 million in cash. Goldshield is a successful U.K. company and could quickly become a strong U.S. player if it continues acquiring recognized brands with low valuations.
Branded Food And Beverage
Food and beverage deals fell most dramatically last year, from more than 38 completed deals in 2000 to only 21 in 2001. Many top brands were picked up earlier, leaving significantly fewer attractive properties available. Valuations, however, continued to be strong for the sector, with companies still going in the six to eight times earnings range, or one to 1.5 times revenues. The Hain-Celestial Group was the most active, acquiring both Fruit Chips BV and Yves Veggie Cuisine, and gaining access to new Canadian and European markets in the process. The year also saw Coca-Cola's first acquisition within the health foods market when, in a surprising move, it acquired Mad River Traders, a small natural and functional beverages business, for a reported $7 million. Many expected Coke to get into the market with a large acquisition such as Red Bull, but the company decided instead to take a small brand and grow it through Coke's massive distribution system. Coke didn't rest on its laurels, though, and snapped up Odwalla as well, adding the popular juice company to its Minute Maid division in a $181 million transaction. Competition in this space should get very intense as the famous rivalry between Coke and Pepsi, which owns SoBe, enters the nutrition market.
The raw materials sector was unusually active, with 19 recorded transactions in 2001, up from four the year before. Companies valued most of the raw material deals around one times revenues, but the high level of activity at the beginning of the value chain indicates valuations may improve as businesses stabilize.
These deals involved large raw-material companies; BASF, DuPont, Pharmachem, Cognis and Balchem all made acquisition moves. BASF shored up its position in the vitamin raw-material field by acquiring Takeda Vitamin's U.S. operations, a strategic move to get further involved in the less volatile vitamins sector. DuPont invested further in its soy protein business by partnering with Hubei Longyun Protein Food Group in a deal that will focus on selling higher-quality soy protein isolates. For different reasons, Pharmachem Laboratories acquired American Ingredients, a leading name in raw materials, for a low price after its parent, Global Health Sciences, filed for bankruptcy.
Cognis and Balchem, on the other hand, tacked on new product lines. In a move that might make U.S. companies wince, Cognis made its first venture into botanical extract raw materials by purchasing Spain's Dr. Vinyals SA. It knows what it's doing—in Europe botanicals continue to be a stable business. Balchem added the choline business of DCV Bionutritionals to its product line for $15 million just before the FDA authorized a choline nutrient-content claim.
In 2002, look for the mid- to small-size players to make acquisitions based on low valuations in almost all sectors. Larger players will likely try to strengthen their positions in their respective sectors as well, but premiums will only be paid in the food and beverage sector. The big question will continue to be, "When is the industry going to turn around?" It may never reach the 20 percent growth rates of a few years ago, but even a small increase in growth can have dramatic effects on company values.
Adam Ismail is a senior consultant at Providence, R.I.-based Health Business Partners Consulting, strategy advisors to the nutrition, natural products, e-health and complementary health care industries. He can be reached at [email protected]
Natural Foods Merchandiser volume XXIII/number 6/p. 50, 54