Natural Foods Merchandiser

Consolidation Continues But Acquirers Seek Safer Ground

Mergers & Acquisitions

Merger activity thinned in 2002, but in the deals that did get done, investors bestowed premiums on the developers of top natural and organic brands.

About 76 deals were struck in the nutrition segment in 2002, down about 10 percent from 84 transactions in 2001, a 17 percent decline from the year before. Interest in companies with well-known brands helped brake the deep slide in M&A that began in 2000, according to Providence, R.I.-based Health Strategy Consulting.

"There has been more of a move to consumer products because it's safer ground," said Mike Chase, managing director of Health Business Partners, also in Providence. Merger and acquisition activity in general dropped 3.2 percent in 2002 and 21 percent in 2001.

"In '97, '98, '99 and 2000, food was not sexy," Chase said. "Natural has its own appeal, but generally, whether you're talking about manufacturing for foodservice, brands, contract manufacturing or private label, it wasn't sexy. Yet, it was still growing, 3, 4, 5, even 7 percent in some cases.

"Investors have kind of ditched technology and telecom. The returns are perhaps lower, but food is easier to understand and safer," Chase said.

Because many top-performing brands already have been picked, valuations for the remaining marquee products are on the rise.

The year kicked off with dairy titan Dean Foods' $189 million deal for White Wave Inc., the Boulder, Colo.-based soymilk maker that logged $125 million in 2001 sales. The year wound down with private-equity groups and brand aggregators reeling in smaller brands with big market potential.

Patrick Turpin, managing director of USBX Advisory Services' food and beverage practice, cites Swander Pace Capital and Solera Capital's investments in Oregon Chai and Annie's Homegrown, respectively, as typical of what he expects to see this year. "Solera Capital formed an investment thesis that natural and organic was a very powerful, long-term trend and said, 'Let's get involved where there still is plenty of room to grow the business,' " Turpin said.

Financial investors accounted for about 22 percent of the transactions in 2002, up from 8 percent the year before. Turpin and Chase say the trend is likely to continue as private equity groups used to making investments of $50 million or higher begin to relax their size requirements.

"There are only about 21 [naturals and organics companies] with revenues of over $50 million, and a lot of those are divisions of larger companies," Turpin said. "I don't see a slowdown in activity, that's for sure. It's just that the level of activity is going to be held back by the supply of companies doing $20 million or more in annual revenue. There is immense buyer and investor demand for the right companies."

Turpin said many of this year's deals will be "tuck-ins" of smaller companies by businesses looking to extend their product line or distribution clout, similar to the deal consummated this February between Londonderry, N.H.-based Stonyfield Farm Inc. and Brown Cow West Corp., based in Antioch, Calif.

"Brown Cow gives us a manufacturing base on the West Coast. Now we don't have to look to a future of shipping across the country, which is uneconomical and unecological," Stonyfield Chief Executive Officer Gary Hirschberg said. "But Brown Cow complements our line in a lot of ways. In case our maniacal dedication to becoming 100 percent organic gets in the way of price, we have the conventional Brown Cow brand to help."

Both Acirca Inc. and Hain Celestial Group Inc. remain acquisitive. Acirca completed deals for ShariAnn's Organics Inc. and Spectrum Organic Products' organic ingredients business in 2002; and Hain acquired Imagine Foods. Monterey Pasta, based in Salinas, Calif., extended its line of refrigerated pastas with a $5.5 million cash deal for Emerald Valley Kitchen, a Eugene, Ore., maker of organic sauces, salsas and dips.

Now that the functional foods category has proven its mettle, USBX's Turpin expects high demand for well-developed infused waters and snack bar brands, but it may be a while before the salty snack category heats up. "There is no debate whether soymilk or organic produce are major categories, and now it's not really up for debate whether certain functional foods categories are viable," he said. "But it is not at all a given that the mainstream consumer will embrace organic or all-natural foods. A lot of investors are hesitant to back concepts that aren't proven out—it doesn't matter if you're a strategic or financial investor."

Supplements was the only category in which the number of deals increased, led by Bohemia, N.Y.-based NBTY's purchase of the Synergy Plus line of vitamins. The company also agreed to buy a wholesale distributor and a group of GNC stores and natural products retailers in the United Kingdom and the Netherlands.

"NBTY is one of the few shining stars, and they're very good at what they do," Health Business Partners' Chase said.

Deals among distributors and sales channels dropped to 14 in 2002, due in part to heavy industry consolidation, according to Health Strategy Consulting. United Natural Foods Inc. gobbled up two of the last independent distributors, Blooming Prairie Cooperative and Northeast Cooperatives, in the last months of 2002.

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