Word From Wall Street: Are We on the Verge of Significant Consolidation?

By Adam Ismail, Executive director of the Global Organization for EPA and DHA Omega-3s (GOED) | May 1, 2012

M&A activity is on the rise in the supplement market.

Merger and acquisition activity has picked up of late. In fact, Nutrition Capital Network was recently quoted as saying that it is up about 10% over last year—and I think it might even be more significant than that. Perhaps it’s just that there’s a lot of big names involved. Regardless, the consumer side of the nutrition value chain seems particularly active.
So what’s going on here? Are we on the verge of significant consolidation in the industry?

The Buyers

The first step in analyzing M&A trends is to look at the buyers. After all, you can’t buy anything if there’s no money available. In the past, NBTY and Atrium have been major buyers of undervalued companies. More recently, however, other active acquirers have moved in.

These buyers generally have one thing in common—they are financially strong. This could mean that they already have a lot of cash in the bank, or ready access to credit because their business is strong. Either way, they tend to be some of the larger companies in this space.
One such company is Schiff, which made news about a year ago when it acquired the Ganeden BC-30 probiotic line, along with the Sustenex and Digestive Advantage brands in which it is used. But it doesn’t stop there. In early April, Schiff bought into the immunity segment by acquiring Airborne for $150 million.

Pfizer’s Consumer Health business has also been quite active, even though it is on the auction block itself. Last year it acquired Ferrosan, an important supplement company in Northern Europe. Earlier this year, it acquired Alacer’s Emergen-C business in North America.
The reason Schiff and Pfizer are notable is because there are several similar companies in the nutrition industry already and if this is the start of a wave of consolidation, these types of companies may start to get more active. If this is indeed part of a larger trend, be on the lookout for more acquisitions by companies with more than $100 million in supplement sales.
The Targets

As for the target side of the equation, companies that are in the $20-100 million range in revenues are the most attractive targets. If larger companies are the ones with access to significant amounts of cash for acquisitions, then they will likely be seeking out businesses with critical mass. It is rare for companies like this to buy smaller businesses, and if they do, these acquisitions will typically come with some sort of special technology or intellectual property that makes it worth the added risk.
As the moves by Schiff and Pfizer show, companies that are focused may be in high demand. In particular, companies that have a significant portion of their revenues in hot categories like omega 3s or probiotics could be highly valued for their growth potential and lower risk profiles that come with science-backed ingredients. Other highly valued targets may include companies focused in specific geographies or channels, in part because they could allow expansion into a new area for the acquirer. It would not really be responsible to speculate as to which companies may be for sale or not, but again, watch for companies fitting these characteristics to be sold to identify whether we are entering a consolidation phase.

Another sign that the industry might be consolidating is to look for “outsiders” buying into this space at large valuations. We saw this in the late 1990s and early 2000s when really high multiples were being paid by drug and consumer product companies to enter the supplement space. Most of those acquisitions have not delivered great financial returns, but since the supplement industry is viewed as a consumer-focused industry, it can be very attractive strategically for these types of companies.
Proctor & Gamble’s recent purchase of New Chapter is a good example of this trend. P&G is technically not an outsider, since it introduced a probiotic line a couple years ago. However, it is certainly not a traditional supplement manufacturer. Buying a company the size of New Chapter might have been attractive because it gains P&G a good foothold in the supplement space, as well as access to channels it was not participating in previously.

On the Horizon

So are we on the verge of a significant consolidation in the supplement space? It is definitely possible, and maybe even probable if the macroeconomic factors remain favorable. Watch for big supplement companies to buy more mid-size supplement manufacturers, for industry outsiders to pay big multiples, and for more of the most significant acquisitions to be purchases of mid-size focused companies. These will be sure signs of a consolidation wave.
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