Janica Lane, John LeClaire & Marc Jones07.01.09
What transpired on the nutraceuticals front during the last year? The answer is a lot!
With deteriorating macroeconomic conditions threatening growth and halting overall M&A activity in the second half of 2008 and early 2009, some thought NBTY's purchase of Leiner for $371 million in July 2008 would mark the end of an era of robust M&A activity. Yet the nutraceutical industry has-thankfully-proven more resilient than doubters thought.
According to preliminary research by Boulder, CO-based Nutrition Business Journal (NBJ), U.S. consumer supplement sales reached $25 billion in 2008, growing at a 7% clip and exceeding 2007's growth rate of 6%.1
Factors driving this growth:
Increased use of supplements among Baby Boomers and other demographic groups as proactive, self-directed care becomes the norm and consumers try to avoid costly doctor visits and prescription medications;
The introduction of new specialty products addressing specific health conditions (e.g., omega 3/EFA supplements for heart and brain health; glucosamine and chondroitin for joints; specialty probiotics and enzymes for gut health, etc.); and
Consumers' general desire to take better care of themselves (e.g., the National Sporting Goods Association reports that running shoe sales increased 2% in 2008, beating out most other sporting goods segments).
IRI reports that most supplement segments saw some weakness in the fourth quarter of 2008, although multivitamin, calcium and vitamin A&D sales accelerated versus the first three quarters of the year and many other supplement types continued to grow (e.g., herbal supplements, non-herbal specialty supplements, EFAs). NBJ and AC Nielsen remain optimistic about the resiliency of the industry and its potential to outperform in 2009.
Astute strategic and financial buyers have recognized these trends, and those with the financial resources have capitalized on them. Table I shows strategic nutraceutical M&A activity from August 2008 to May 2009, reflecting an estimated volume of about $620 million. Price multiples in these transactions were in the range of 7.6x to 14.9x EBITDA. While activity levels have remained robust in 2009, transaction terms have generally tightened in a pro buyer direction to include such concepts as earnouts, which are often a means of reducing cash payments required upfront and bridging gaps in buyers' and sellers' assessments of valuation.
From the transaction list it is interesting to note the strong international flavor dominating recent M&A activity, with cross-border deals taking center stage. While NBTY and Nutraceutical were considered the serial acquirers in the past, several international players loomed large on the M&A circuit more recently. Of the 15 strategic deals listed in Table I, almost half were cross-border transactions.
Winning the size award for the year and exemplifying this international trend is Ireland-based Glanbia plc, which acquired Optimum Nutrition (Aurora, IL), a manufacturer and marketer of sports nutrition products and supplements, for $323 million in August 2008. As outlined in Table II, the Optimum deal represents the latest in a series of acquisitions and divestitures made by Glanbia as it transforms itself from a traditional dairy company to one that focuses on food ingredients, nutrition and selected consumer foods.
As Glanbia increased its presence in the ingredients space, Quebec, Canada-based Atrium Innovations moved away from it, spinning off its Active Ingredients & Specialty Chemicals business in mid-2008. Despite this, Atrium is more like Glanbia than it may appear. The companies have pursued different acquisition and divestiture strategies as a means of reaching the same end-becoming pure-play health and nutrition businesses with some degree of vertical integration to ensure product integrity. Like Glanbia, Atrium has been an active player in cross-border M&A, but Atrium's goal has been to dominate the healthcare practitioner sector; it is only now beginning to target end consumers directly. Atrium's most recent acquisition, in January 2009, of probiotic and enzyme company Nutri-Health Supplements (Cottonwood, AZ) for nearly $24 million, supports its specialty supplement strategy, helps round out its product mix, and adds a direct-to-consumer business to its portfolio. Atrium's acquisition and divestiture history is profiled in Table III. Evidencing the overall success of its strategy, Atrium's sales have grown $240 million, from almost $33 million in 2005 to $273 million in 2008 (CAGR of 102%), as a result of both acquisitions and organic growth. Atrium's EBITDA and cash flows have also increased accordingly.
Glanbia's and Atrium's deal structures are also similar in many respects. Both use cash as their acquisition currency. For example, Glanbia funded its acquisitions of Optimum and Seltzer Ingredients using cash flow and funds available under its existing credit facilities, while Atrium used cash from its divestiture, as well as cash flow and an existing revolver to fund its acquisitions. In some cases, both companies have also structured seller compensation in the form of earn-outs (e.g., AtriumNutri-Health and GlanbiaSeltzer). A key difference in the companies' acquisition approaches is valuation. By nature of its smaller size, Atrium has pursued smaller acquisitions and maintained a disciplined approach, with most deals consummated at 6-7x EBITDA. Glanbia, on the other hand, has pursued larger acquisitions that are perhaps less risky and more synergistic and justify higher multiples. It paid nearly 10x EBITDA for Optimum and likely a similar valuation for Seltzer. It remains to be seen whether Atrium's and Glanbia's paths will cross as Atrium grows in scale and increases its focus on the consumer segment.
In addition to strategic buyers, financial buyers have actively pursued venture capital investments, growth equity financings and buyouts in the nutraceutical space during the last year, as illustrated in Table IV. From June 2008 to March 2009, financial buyers completed over 20 investments in the industry, and private placement volume alone during this period exceeded $80 million. The prices being paid in these transactions show that the financial buyers have great expectations for the industry. Ratios of enterprise values to LTM revenues in the private placement transactions listed in Table IV generally range from 12x up to 23x, with the BELLUS Health Inc. transaction at 147x being somewhat of an outlier. Growth financings have been smaller in nature, targeting earlier stage companies operating in high-growth segments of the nutraceutical industry (e.g., omega 3s for Ascenta, herbal supplements for Gaia).
Even recent buyout transactions have focused on growth; all three profiled provided partial liquidity to founders and additional capital for continued growth. Nonetheless, as Table IV shows, these transactions have focused on companies with higher revenue streams.
All of these transactions suggest that M&A and other financing activity continue unabated in the nutraceuticals space. From the perspective of a company founder or management team, the decision to sell, remain independent or something in between is crucial in the life of an enterprise, and the entrepreneur needs to be fully familiar with the pros and cons of each option. Combining with a larger entity in a strategic acquisition/trade sale can bring several benefits to the entrepreneur, including liquidity, transfer of operational risk to the buyer, access to capital and other resources, such as marketing support, and broader distribution and channel penetration. If the buyer is a private equity firm, there may be fewer operational advantages for the entrepreneur, but this is usually offset by the opportunity to "take chips off the table" today (i.e., sell a portion of the entrepreneur's equity to the buyer), which lowers the entrepreneur's investment risk and enables the entrepreneur to maintain an equity stake in the company that may be monetized in a later liquidity event, hopefully at a higher value.
On the other hand, selling to a strategic or financial acquirer can have disadvantages. A small company can become lost in a larger corporate enterprise, snuffing out its entrepreneurial spirit, the vitality of its operations and even the brand itself. Selling too early can mean selling too cheaply. And overleveraging an acquisition can cause difficulties ranging from constriction of operational flexibility to bankruptcy.
Many entrepreneurs seek to straddle these benefits and risks by adding financial partners as they grow (some of whom also partner at an operating level). Many of these partners come from the ranks of "growth equity" investors who focus in the healthy living and general consumer sectors, such as TSG Consumer Partners, Catterton Growth Partners and VMG Partners. Growth equity transactions typically involve an injection of capital into the company to catalyze organic or acquisition-fueled growth. Sometimes (typically in more mature companies) this involves an element of founder liquidity, generally does not involve leverage, and can involve the sale of a minority or a majority stake. In all cases, these transactions are premised on the understanding that there will be a subsequent liquidity event, whether this takes shape as a strategic sale, a sale to another financial buyer or an IPO. (It is notable that there has not been a nutraceutical company IPO since Herbalife's IPO in late 2004 and that in 2008 there were only six U.S. IPOs of venture- and private equity-backed companies.) Growth equity investment multiples also tend to be lower than acquisition multiples in the nutraceutical industry, generally reflecting the lack of a control premium, strategic benefits, synergies and the like. However, from the entrepreneur's perspective, the retention of some degree of control over operations and a continuing equity stake, which typically accompany a growth equity investment, are ample compensation.2
So what will the next year hold in terms of transactional activity in the nutraceuticals industry? If the last several years are any indication, the answer will be the same as the answer to the question of what happened in the past year-a lot! In fact, activity levels could rise to even higher levels should the economy recover. Key factors likely to drive future company success, as well as M&A and financing activity include: innovation; vertical integration to ensure integrity of manufacturing and ingredients, particularly after new GMP standards go into effect; a focus on direct-to-consumer sales and other channel diversification; high interest in non-prescription products backed by strong science and clinical studies; and a continued focus on specific functional needs and the growth of related specialty supplements.
References:
With deteriorating macroeconomic conditions threatening growth and halting overall M&A activity in the second half of 2008 and early 2009, some thought NBTY's purchase of Leiner for $371 million in July 2008 would mark the end of an era of robust M&A activity. Yet the nutraceutical industry has-thankfully-proven more resilient than doubters thought.
According to preliminary research by Boulder, CO-based Nutrition Business Journal (NBJ), U.S. consumer supplement sales reached $25 billion in 2008, growing at a 7% clip and exceeding 2007's growth rate of 6%.1
Factors driving this growth:
Increased use of supplements among Baby Boomers and other demographic groups as proactive, self-directed care becomes the norm and consumers try to avoid costly doctor visits and prescription medications;
The introduction of new specialty products addressing specific health conditions (e.g., omega 3/EFA supplements for heart and brain health; glucosamine and chondroitin for joints; specialty probiotics and enzymes for gut health, etc.); and
Consumers' general desire to take better care of themselves (e.g., the National Sporting Goods Association reports that running shoe sales increased 2% in 2008, beating out most other sporting goods segments).
IRI reports that most supplement segments saw some weakness in the fourth quarter of 2008, although multivitamin, calcium and vitamin A&D sales accelerated versus the first three quarters of the year and many other supplement types continued to grow (e.g., herbal supplements, non-herbal specialty supplements, EFAs). NBJ and AC Nielsen remain optimistic about the resiliency of the industry and its potential to outperform in 2009.
Financial Trends
Astute strategic and financial buyers have recognized these trends, and those with the financial resources have capitalized on them. Table I shows strategic nutraceutical M&A activity from August 2008 to May 2009, reflecting an estimated volume of about $620 million. Price multiples in these transactions were in the range of 7.6x to 14.9x EBITDA. While activity levels have remained robust in 2009, transaction terms have generally tightened in a pro buyer direction to include such concepts as earnouts, which are often a means of reducing cash payments required upfront and bridging gaps in buyers' and sellers' assessments of valuation.
From the transaction list it is interesting to note the strong international flavor dominating recent M&A activity, with cross-border deals taking center stage. While NBTY and Nutraceutical were considered the serial acquirers in the past, several international players loomed large on the M&A circuit more recently. Of the 15 strategic deals listed in Table I, almost half were cross-border transactions.
Winning the size award for the year and exemplifying this international trend is Ireland-based Glanbia plc, which acquired Optimum Nutrition (Aurora, IL), a manufacturer and marketer of sports nutrition products and supplements, for $323 million in August 2008. As outlined in Table II, the Optimum deal represents the latest in a series of acquisitions and divestitures made by Glanbia as it transforms itself from a traditional dairy company to one that focuses on food ingredients, nutrition and selected consumer foods.
As Glanbia increased its presence in the ingredients space, Quebec, Canada-based Atrium Innovations moved away from it, spinning off its Active Ingredients & Specialty Chemicals business in mid-2008. Despite this, Atrium is more like Glanbia than it may appear. The companies have pursued different acquisition and divestiture strategies as a means of reaching the same end-becoming pure-play health and nutrition businesses with some degree of vertical integration to ensure product integrity. Like Glanbia, Atrium has been an active player in cross-border M&A, but Atrium's goal has been to dominate the healthcare practitioner sector; it is only now beginning to target end consumers directly. Atrium's most recent acquisition, in January 2009, of probiotic and enzyme company Nutri-Health Supplements (Cottonwood, AZ) for nearly $24 million, supports its specialty supplement strategy, helps round out its product mix, and adds a direct-to-consumer business to its portfolio. Atrium's acquisition and divestiture history is profiled in Table III. Evidencing the overall success of its strategy, Atrium's sales have grown $240 million, from almost $33 million in 2005 to $273 million in 2008 (CAGR of 102%), as a result of both acquisitions and organic growth. Atrium's EBITDA and cash flows have also increased accordingly.
Glanbia's and Atrium's deal structures are also similar in many respects. Both use cash as their acquisition currency. For example, Glanbia funded its acquisitions of Optimum and Seltzer Ingredients using cash flow and funds available under its existing credit facilities, while Atrium used cash from its divestiture, as well as cash flow and an existing revolver to fund its acquisitions. In some cases, both companies have also structured seller compensation in the form of earn-outs (e.g., AtriumNutri-Health and GlanbiaSeltzer). A key difference in the companies' acquisition approaches is valuation. By nature of its smaller size, Atrium has pursued smaller acquisitions and maintained a disciplined approach, with most deals consummated at 6-7x EBITDA. Glanbia, on the other hand, has pursued larger acquisitions that are perhaps less risky and more synergistic and justify higher multiples. It paid nearly 10x EBITDA for Optimum and likely a similar valuation for Seltzer. It remains to be seen whether Atrium's and Glanbia's paths will cross as Atrium grows in scale and increases its focus on the consumer segment.
In addition to strategic buyers, financial buyers have actively pursued venture capital investments, growth equity financings and buyouts in the nutraceutical space during the last year, as illustrated in Table IV. From June 2008 to March 2009, financial buyers completed over 20 investments in the industry, and private placement volume alone during this period exceeded $80 million. The prices being paid in these transactions show that the financial buyers have great expectations for the industry. Ratios of enterprise values to LTM revenues in the private placement transactions listed in Table IV generally range from 12x up to 23x, with the BELLUS Health Inc. transaction at 147x being somewhat of an outlier. Growth financings have been smaller in nature, targeting earlier stage companies operating in high-growth segments of the nutraceutical industry (e.g., omega 3s for Ascenta, herbal supplements for Gaia).
Even recent buyout transactions have focused on growth; all three profiled provided partial liquidity to founders and additional capital for continued growth. Nonetheless, as Table IV shows, these transactions have focused on companies with higher revenue streams.
All of these transactions suggest that M&A and other financing activity continue unabated in the nutraceuticals space. From the perspective of a company founder or management team, the decision to sell, remain independent or something in between is crucial in the life of an enterprise, and the entrepreneur needs to be fully familiar with the pros and cons of each option. Combining with a larger entity in a strategic acquisition/trade sale can bring several benefits to the entrepreneur, including liquidity, transfer of operational risk to the buyer, access to capital and other resources, such as marketing support, and broader distribution and channel penetration. If the buyer is a private equity firm, there may be fewer operational advantages for the entrepreneur, but this is usually offset by the opportunity to "take chips off the table" today (i.e., sell a portion of the entrepreneur's equity to the buyer), which lowers the entrepreneur's investment risk and enables the entrepreneur to maintain an equity stake in the company that may be monetized in a later liquidity event, hopefully at a higher value.
On the other hand, selling to a strategic or financial acquirer can have disadvantages. A small company can become lost in a larger corporate enterprise, snuffing out its entrepreneurial spirit, the vitality of its operations and even the brand itself. Selling too early can mean selling too cheaply. And overleveraging an acquisition can cause difficulties ranging from constriction of operational flexibility to bankruptcy.
Many entrepreneurs seek to straddle these benefits and risks by adding financial partners as they grow (some of whom also partner at an operating level). Many of these partners come from the ranks of "growth equity" investors who focus in the healthy living and general consumer sectors, such as TSG Consumer Partners, Catterton Growth Partners and VMG Partners. Growth equity transactions typically involve an injection of capital into the company to catalyze organic or acquisition-fueled growth. Sometimes (typically in more mature companies) this involves an element of founder liquidity, generally does not involve leverage, and can involve the sale of a minority or a majority stake. In all cases, these transactions are premised on the understanding that there will be a subsequent liquidity event, whether this takes shape as a strategic sale, a sale to another financial buyer or an IPO. (It is notable that there has not been a nutraceutical company IPO since Herbalife's IPO in late 2004 and that in 2008 there were only six U.S. IPOs of venture- and private equity-backed companies.) Growth equity investment multiples also tend to be lower than acquisition multiples in the nutraceutical industry, generally reflecting the lack of a control premium, strategic benefits, synergies and the like. However, from the entrepreneur's perspective, the retention of some degree of control over operations and a continuing equity stake, which typically accompany a growth equity investment, are ample compensation.2
So what will the next year hold in terms of transactional activity in the nutraceuticals industry? If the last several years are any indication, the answer will be the same as the answer to the question of what happened in the past year-a lot! In fact, activity levels could rise to even higher levels should the economy recover. Key factors likely to drive future company success, as well as M&A and financing activity include: innovation; vertical integration to ensure integrity of manufacturing and ingredients, particularly after new GMP standards go into effect; a focus on direct-to-consumer sales and other channel diversification; high interest in non-prescription products backed by strong science and clinical studies; and a continued focus on specific functional needs and the growth of related specialty supplements.