With natural and organic products posting strong sales in every trade channel, companies in the industry remain coveted prizes in the mergers and acquisitions game.

So coveted, in fact, that too many people with too much money continue to chase too few deals. According to data collected by Nutrition Business Journal, 99 M&A transactions were completed in the naturals industry in 2004, almost double 2003?s total of 58.

More than 100 private equity deals were completed in 1999 and again in 2000, but that number dropped to 56 in 2001 and stayed that way for three years.

?Companies today are more actively marketing themselves as acquisition candidates,? NBJ Editor-in-Chief Grant Ferrier said in the San Diego publication?s most recent ?Mergers & Acquisitions? Report.

?Entrepreneurs are once again shopping their companies to strategic buyers and investors but coming to the negotiation table with reasonable valuation expectations? of 0.9 times sales, down from 1.6 times sales at the height of consolidation frenzy in the late 1990s, Ferrier said.

M&A deals announced in the first half of 2005 included: Sunset Brands? acquisition of U.S. Mills for $20 million; Northland Cranberry Juice?s purchase of Apple & Eve for $11 million; Monterey Foods? acquisition of Sonoma Cheese Co. for an undisclosed sum; Weider Nutrition International?s spinoff of its eponymous brands to Weider Health & Fitness for $14 million; and Swander Pace Capital/Shadewell Groves Foods? purchase of GeniSoy for $20 million.

The number of deals would be a lot higher if there were more acquisition targets on the market, said Pat Turpin, a middle-market private equity investment banker at USBX Advisory Services in Santa Monica, Calif.

?There can be lots of buyer interest, but if nobody?s selling, there?s not going to be any transactions,? he said.

That?s not to say there aren?t plenty of good companies out there. But to attract financing or an acquisition bid, a company must be the right size, with growth and distribution in both the naturals and mass channels of trade.

And the owners must be willing to sell. Some of the most attractive independent operators in naturals and organics are family- or employee-owned companies whose desire to stay independent is ferocious.

In the 1990s, a good target for acquisition was a company with sales in the $40 million to $50 million range. But these days, it?s best if you ?don?t hold your breath,? Turpin said. ?There?s very few of them.? Recent transactions in personal care have involved companies with sales of less than $20 million.

Mass-market distribution, or at least the potential to be successful in mass, is another prerequisite for many buyers. ?The landscape is littered with $3 [million] to $5 million companies with lots of distribution in the natural channel but no distribution anywhere else,? Turpin noted.

Even these smaller companies are being wooed by both strategic buyers—companies that add to their portfolio of products through acquisition, such as Hain Celestial Group and Nutraceutical International—and institutional buyers, generally investment firms that raise pools of capital to invest.

The cloud over nutritional supplements has lifted, at least from an investor perspective, with several supplements companies changing hands last year, said Mike Chase, managing director of Health Business Partners, an investment banking firm in Warwick, R.I.

?How long is the window open for supplements? I think that?s what?s on everybody?s mind,? Chase said. And what?s hot on retailers? shelves remains hot in the private equity markets, with natural and organic snacks, personal care, home-care products and pet products attracting both buzz and capital.

The biggest deals in 2004, according to Health Business Partners and NBJ, included the following:

Better stock prices among publicly traded companies have increased the amount of money available for acquisitions. Several of the industry?s best-known consolidators were active in 2004 and early 2005. Hain Celestial Group acquired Jason Natural Cosmetics in June 2004 for an estimated $24 million. Hain also added to its frozen food holdings in May 2004 by purchasing H.J. Heinz?s Ethnic Gourmet and Rosetto brands for an estimated $30 million. Speculation that the Jason deal kicked off a Hain roll-up of personal care companies was confirmed in April 2005 when Hain paid an estimated $10 million for Zia Natural Skincare.

Nutraceutical International acquired two supplements companies in 2004, Montana Big Sky in June for $600,000 and Natural Balance in May for $9 million. Nutraceutical also made two small retailer acquisitions in 2004.

Retail mergers and acquisitions were almost entirely absent from the scene, with the exception of Whole Foods Market?s purchase of London-based Fresh & Wild for an estimated $38 million and Planet Organics? ongoing consolidation of Canadian naturals stores, including Sangster?s and Great Ocean Naturals in 2004 and Newfound Health in February 2005.

NBTY stayed out of the market in 2004, but in February the Long Island supplement manufacturer and retailer paid $5 million for Le Naturiste Jean-Marc Brunet, a 30-year-old chain with 103 stores in Quebec and $2 million in sales.

Companies in the categories where consolidation is happening—including personal care—should be ?looking in the rearview mirror,? Turpin said. When competitors hook up with a corporate owner, the deal usually brings more money for promotion, new product development and slotting fees.

A few years ago, artisan bakeries were a hot target for acquisition. LaBrea Bakery and Ecce Panis brought high valuations and proceeded to use the capital for aggressive national brand campaigns. Other artisan bread companies that waited on the sidelines, and later put themselves on the market, discovered that the premium prices LaBrea and Ecce Panis had commanded were no longer being offered.

Firms like Health Business Partners are trying to figure out how to satisfy the capital needs of the many solid small natural products companies seeking to reach the next level. ?There?s a dearth of financing sources out there willing to write $1 million to $5 million checks,? Chase said. New player Greenmont Capital Partners, with $15 million to invest, is a rare exception.

?You have a bunch of capital that is out in the marketplace today that wasn?t out there in the ?90s,? Chase said. But, paradoxically, large private equity funds can?t justify the time and effort it takes to invest in a small company that can offer only a limited return. ?A $500 million fund needs to make $25 million to $30 million deals on average,? he said.

Private equity funds that have closed successful placements—such as North Castle Partners? sale of EAS to Abbott Labs—now have money to invest. And strategic buyers, who sat out the early years of the millennium, are returning in force, Turpin and Chase said.

?It doesn?t go on forever,? Turpin said. ?The big mistake a lot of these owners make is they look inward, ?What?s the right time for my company?? ? While that?s a crucial question, he added, ?You have to look outward to the market.?

Natural Foods Merchandiser volume XXVI/number 6/p. 38-39