Summer has been sizzling with acquisitions and investments in the naturals industry. Among recent transactions:
- Dean Foods solidified its hold on the dairy case, paying $216 million in cash and assuming $40 million in debt for Horizon Organic Dairy;
- Rudi's Organic Bakery received commitments for as much as $4 million from the Iowa Farm Bureau Foundation, a move that Rudi's Chief Executive Mark Retzloff says paves the way for his retirement;
- Hain Celestial Group bought Acirca Inc., owner of the Walnut Acres brand of organic products, for an estimated $13.5 million;
- NBTY snapped up Rexall Sundown for $250 million, a fraction of the $1.8 billion Royal Numico NV paid in 2002 for the vitamin maker.
Why All The Activity?
"It's the mosaic theory," said Scott Van Winkle, a principal for Boston investment banker Adams, Harkness & Hill. A cluster of unrelated deals "sometimes can indicate an inflection point."
As much as $100 billion in private equity is sitting on the sidelines, but as the number of independent companies with sales greater than $50 million dwindles, too much money is chasing too few deals. "Typically, a Nestle, General Mills or large packaged foods company will buy something as long as they think it has the legs to get [them] $100 million in sales," said Mike Chase of Health Business Partners, a consulting firm in Warwick, R.I.
That could change, however, as pressure builds on food manufacturers to improve nutrition. "The Krafts of the world either have to develop these products internally, or buy them," said Pat Turpin, managing director at USBX Advisory Services in Santa Monica, Calif.
"If you make a list of names with revenue in the $15 million to $25 million range," Turpin said, "most of those companies are receiving a lot of phone calls."
In April, San Francisco-based private equity firm The Shansby Group took an unspecified minority stake in Energy Brands Inc., the makers of Glaceau Vitaminwater of Whitestone, N.Y. Two months later, it invested in Harry's Fresh Foods of Portland, Ore., which makes refrigerated and frozen soups, sides and entrees for retail and foodservice.
Financial investors—often private equity firms—can be useful to companies that don't want to sell but need more resources than a venture capitalist or angel investor will provide. "A couple of years ago, you couldn't talk to a PE firm, but now there's a lot of interest in minority positions," said David Thibodeau, a principal at Adams, Harkness & Hill.
Horizon Organic Holdings
What does this burst of activity mean for retailers? Manufacturers hope new investment will help them move more products to more store shelves in broader swathes of the country.
That's the case with Dallas-based Dean, which became the big cow in the naturals herd June 30 by adding the largest organic milk brand in the country—Horizon Organic—to its portfolio, which already includes White Wave's Silk soymilk line.
"They bought us because they view us as an incredible growth opportunity," said Chuck Marcy, chief executive of Longmont, Colo.-based Horizon. Conventional milk sales have been growing about 3 percent a year, while organic milk sales rose 20 percent. "The conventional dairy industry has been very weak," Marcy said, suggesting that market clout behind Horizon will encourage small dairy farmers to switch to organic production.
"They've worked their way into some interesting distribution paths," said Health Business Partners' Chase, "if you think of Starbucks as a distribution channel—and I do."
The Dean acquisition increases Horizon's access to "the largest and most sophisticated refrigerated distribution system in the country," Marcy said. From a retailing perspective, he said, "We can be responsive to [retailers'] desire for more innovation in the dairy case."
Rudi's Organic Bakery
Rudi's Organic Bakery found the bread it needed for expansion via a private sale of the company's Colorado assets to a new equity partner, Iowa Farm Bureau Federation of Des Moines. Terms weren't disclosed, but a letter to creditors from David Sengpiel, Farm Bureau's director of alternative investments, says the group would commit up to $4 million to meet Rudi's cash needs.
That's enough to fund expansion of Rudi's Boulder plant, which has been running three shifts six days a week to meet demand. And, said Rudi's Chief Executive Mark Retzloff, it means that he's ready to hand off Rudi's to a new CEO.
Retzloff came out of retirement from Horizon in 2001 to right the ship at Rudi's. A six-month project stretched longer than two years. "The problems were deeper and more pervasive than I thought," he said.
Rudi's closed a brand-new plant in North Liberty, Iowa, that had been financed through $12.2 million from a controversial public-private partnership, TecTerra Food Capital, in which the Farm Bureau has an interest. With TecTerra owning two-thirds of Rudi's, Farm Bureau management realized, "The best way for them to recoup their investment was to become an equity partner," Retzloff said. Recapitalized, under a new ownership structure, with a new board and management, "Rudi's kind of rose out of the flames."
Its marketing now aims at families, selling organic versions of mainstream items like soft white and wheat sandwich breads, hamburger and hot dog buns, as well as artisan breads. Sales at Rudi's jumped 27 percent in 2002, and June 2003 sales are up 50 percent year-over-year, said sales vice president Victoria Smith. Rudi's switched successfully from a third-party distribution model with EarthGrains to directly distributing blast-frozen products to retailers in key organic markets like Los Angeles, Chicago and Austin.
Hain Celestial Foods continued its growth through acquisition June 17, buying Acirca Inc. for an undisclosed sum estimated by analysts at $10 million to $15 million. Melville, N.Y.-based Hain gains a range of certified organic products with $20 million in sales last year, including the former Mountain Sun juice line and Walnut Acres soups, pasta sauces and salsas.
Chief Executive Mark Rodriguez, formerly of Dannon Waters, formed Acirca in 2000 to acquire the 54-year-old Walnut Acres brand. The changes were drastic: Walnut Acres' 1,500-item catalog operation and manufacturing plant in Pennsylvania shut down, its organic farm was sold back to its founding family and all but 20 of its products were discontinued. Acirca bought Mountain Sun, ShariAnn's Soups and Frutti di Bosco and Millina's Finest pasta sauces, and rolled out new products like soup in reheatable jars and applesauce in a tube. To promote them, Acirca spent $2 million on TV, radio and print ads in publications like Gourmet, an insane strategy for products with limited distribution, Van Winkle said.
Too many investors were stirring the broth at Acirca, including media mogul Ted Turner, America Online founder Steve Case and others with no background in the naturals industry. Said Ben James of North Castle Partners, Acirca's lead investor: "We had the wrong business model with the wrong management team."
Royal Numico paid for its foray into the U.S. nutritional business. It sold Boca Raton, Fla.-based Rexall June 10 to NBTY for $250 million, just a year after it bought it for $1.8 billion. NBTY, based in New York, has had dealings with the Dutch company before; it paid $12 million to Numico in March for its General Nutrition Centers in the United Kingdom and Germany.
Nevertheless, the Rexall deal "surprised a lot of people," Turpin said. Consensus estimates of the sale price had hovered between $300 million and $400 million—and even that was "quite a markdown."
Rexall Sundown, which had sales in 2002 of $455 million, owns several big-name brands, including MET-Rx and CarbSolutions. "Put in more capable hands, more could be done with it," Turpin thinks. And Chase believes NBTY is more than capable. "They had a lot of critics, but they're a great value buyer," he said.
Observers expected NBTY to follow its purchase of the European GNC holding company by buying GNC's Pittsburgh parent and its 5,000 U.S. stores. But that deal never gelled. Numico Chief Executive Jan Bennink said July 7 that GNC would be given a year to improve results, but Numico is still accepting bids for GNC, while signaling investors that this will not be a fire sale. "There's not that sense of urgency," said Van Winkle. "They're going to get a better price for GNC," he said, putting his estimate in the $700 million to $1 billion range.
Natural Foods Merchandiser volume XXIV/number 8/p. 1, 7