Adam Ismail07.01.01
Chronicling NBTY’S Ups And Downs
Major market player going strong.
By Adam Ismail
Mergers and other deal flow virtually came to a halt in the nutrition space in recent months, as the space has suffered from slowing growth rates and a number of bigger public players have had financial difficulties that have hampered their abilities to negotiate deals. The first company in the sector to start experiencing these hiccups—back in 1999—was NBTY Inc., maker of a number of supplement lines and owner of the Vitamin World and Holland & Barrett retail chains. You could make the case that its “first mover” status in that arena actually helped the company because it was also the first out of financial difficulties. While the rest of the major public players are in the midst of their recoveries, NBTY is already standing strong and is making good use of its position. It recently bought the NatureSmart supplement manufacturing division from Whole Foods Markets, the largest natural foods retailer in the U.S.
The division used to be called Amrion Inc. and has a peculiar past within Whole Foods, which as a retailer never really knew how to compete with a branded supplement company. Whole Foods bought the company back in the heyday of the supplement industry…1997. At that point Amrion had $68 million in revenues, healthy 13% EBITDA margins and 26% topline growth over the previous year. It seemed like a great buy, so Whole Foods stepped in with a whopping payout totaling $156 million. Since the acquisition, sales at the division have fallen to $59 million and it was unprofitable the last time the company made an announcement about it. NBTY came in this time and paid $28 million in cash for the business and will now just sweep it into its manufacturing operations.
NBTY is a very diversified player in the space. On the back end of the value chain it supplies ingredients and contract manufacturing services; in the middle, it sells its own brands of supplements to retailers and health practitioners and on the front end it owns its own retail stores, catalogs and internet sites, all of which reach the consumer directly. In addition to value chain diversification, it also diversifies geographically, owning stores in the U.S. and the U.K., a strategy that has served it well recently because the U.K. supplement space has been growing strong.
Former Piper Jaffray equity analyst Yudi Bahl predicted in April that NBTY would be a major player in the supplement space going forward because it was uniquely positioned to make a number of acquisitions. Since that time, the company has acquired Amrion and another major player, Global Health Sciences. In both cases, NBTY took advantage of the low valuations in the industry and picked them up at bargain basement prices. As one of the only completely vertically integrated, multi-channel players in the segment it can choose from all types of companies.
In addition, the leader in the space, Royal Numico, is the only player that competes directly head on at all levels with NBTY; it fills its excess capacity with contract manufacturing orders, it owns the Rexall Sundown line of supplements and the General Nutrition Center retail outlets. As a result of acquisitions Numico now controls 20-25% of the U.S. supplement market. NBTY, with just under $1 billion in revenues after its most recent acquisitions, has no choice but to grow rapidly through acquisitions if it wants to be one of the last players standing.
Who will it likely acquire next? Its Amrion acquisition gave it its first beachhead into the health practitioner market, where there are a number of $60-100 million dietary supplement manufacturers that control a significant share of market. The company will also likely strengthen its retail operations by buying more small, three- or four-store retail chains, which provide additional shelf space for products that will fill its manufacturing capacity. Both of these sectors are strong growth areas for the company and ones it has publicly stressed as opportunities for the future.
A key measure of success for the company is how much capacity it will be able to fill, as right now the whole industry is suffering from overcapacity. The more acquisitions the company makes, the stronger its position becomes because it won’t suffer from the pitfalls that come with too much capacity. NBTY’s size, its position in the industry and its stronger financial position will leave it with a number of acquisition options and you can bet it will be taking advantage of them.NW