Healthy Food Sector Nourished by Mergers and IPOs

Consumers in developed markets increasingly accept that a healthier diet will lead to dramatically improved health over the medium- to long-term. This trend is leading to a wave of strategic acquisitions by major food manufacturers, new investments by private equity firms, and, in select cases, Initial Public Offerings (IPOs) in businesses well positioned to thrive in the healthy lifestyle market. Several factors are driving consumer demand and improving awareness of the risks of poor eating habits, including:

• An aging population focused on
• remaining healthy and active until late in life.
• Increasing rates of obesity, which has quickly become a leading U.S. health issue, given well-documented links to diabetes, high blood pressure, coronary artery disease, coronary vascular disease, heart attack, stroke, and cancer.
• An aspirational desire by empowered consumers with discretionary income to be as fit and healthy as possible.

The trend towards healthy eating is not likely to change course anytime soon, and it may gain momentum as consumers

increasingly opt for better-for-you product alternatives with complex and sophisticated flavor profiles. This expanded product range accompanies increasingly compelling data supporting the importance of a healthy lifestyle. A study published in July by the Journal of the American Medical Association found that Americans are living longer than they did two decades ago, but, based on a few key measures, they are not as healthy as people in other developed nations. The study has been heralded as the most comprehensive analysis of the health of the U.S. population in more than 15 years. The key finding is that we have made significant strides in reducing death rates across a variety of diseases, but death rates from illnesses associated with obesity are on the rise.

As a result of the increased focus on improved diets and better availability of healthy food alternatives, the U.S. market for natural, organic, and functional food and beverage items increased from approximately $87 billion in 2011 to approximately $95 billion in 2012-an increase of nearly 9% in contrast to an increase of less than 4% for the entire food and beverage market, according to Nutrition Business Journal. Natural, organic, and functional food and beverage sales accounted for nearly 14% of total U.S. food sales in 2012, up from just over 11% in 2008.

Over the past decade, there has been a tectonic shift in the developed world towards healthier eating and a renewed focus on health and disease prevention. Major food manufacturers, in addition to public and private investors, have taken notice. The natural, organic, and functional space is where food and beverage companies see the greatest growth opportunities. Companies like General Mills, PepsiCo, Kraft, J.M. Smucker, ConAgra, Coca-Cola, Nestle, Mondelez, Post, Campbell Soup, Heinz, and Kellogg have launched initiatives focused on making their product portfolios healthier through new product development and/or bolt-on acquisitions.

Up-and-coming healthy food and beverage companies are particularly susceptible to acquisitions by larger industry players. That’s because strategic buyers can pay relatively high prices to take advantage of tangible opportunities to earn meaningful cost and revenue synergies by dropping acquired products into their existing infrastructure and distribution network. Since the beginning of 2013, a flood of relevant strategic deals have been announced,
including:

• B&G Foods acquisition of VMG Partners-backed Robert’s American Gourmet Food, producer of all natural Pirate’s Booty puffed snacks.
• Danone’s acquisition of Catterton Partners-backed YoFarm Yogurt, producer of healthy yogurt snacks.
• Campbell Soup’s acquisition of Catterton Partners-backed Plum Organics, producer of organic snacks for children and organic baby food.
• Post’s acquisition of Premier Nutrition, producer of protein beverages and foods under the Premier Protein brand, and nutritional supplements under the Joint Juice brand.
• Japan-based Kameda Seika’s acquisition of Mary’s Gone Crackers, producer of organic, vegan, and gluten-free snacks.
• J.M. Smucker’s acquisition of Enray, producer of organic, gluten-free ancient grain products marketed under the truRoots brand.
• Omega Protein’s acquisition of Wisconsin Specialty Protein, producer of organic and hormone-free whey protein products under the tera’swhey brand.
• Danone’s acquisition of Happy Family, producer of organic toddler and baby foods.
• Post’s acquisition of Attune Foods, producer of natural and organic cereals.

However, in many cases, food and beverage companies need to obtain an appropriate scale before attracting high-paying industry consolidators. In order to support numerous growth initiatives, many of these smaller businesses choose to partner with private equity investment groups with relevant experience to provide growth capital, board-level support, and guidance, and to diversify the founder’s risk by allowing him or her to take a few chips off the table. New private, equity-backed platforms formed in 2013 include the following:

• UK-based Equistone Partners acquisition of European Capital-backed Whitworths, a producer of healthy dried fruit, nut, and seed products.
• Brynwood Partners’ acquisition from Kraft Foods of Back to Nature, a producer of better-for-you snacks and juices.
• Kohlberg & Co.’s acquisition of Nellson Nutraceutical, a producer of branded and private-label nutritional bars and functional powders.
• RoundTable Healthcare Partners’ acquisition of Santa Cruz Nutritionals, a producer of gummy-based vitamins for children and adults.

For very few, select high-growth food and beverage companies, the public equity markets may be the best option to create liquidity for investors and to finance growth initiatives, and the majority of these recent offerings have been well received by the markets. As of October 23, the median share price of healthy food companies that completed IPOs in 2012 and 2013 is more than double their IPO price. These names include:

• •    Sprouts Farmers Market (stock is up approximately 165% from the IPO price), a specialty food retailer focused on the natural and organic category.

•    Fairway Group (stock is up about 90% from the IPO price), another specialty food retailer with significant floor space dedicated to natural and organic products.
•    WhiteWave Foods (stock up approximately 17% from the IPO price), a producer of organic soy products such as tofu, milk, yogurt, and tempeh, spun out of Dean Foods in late 2012.
•    Natural Grocers by Vitamin Cottage (stock up about 155% from the IPO price), a specialty food retailer that, like Sprouts, is focused on healthier food products.
•    Annie’s (stock up approximately 150% from the IPO price), a producer of natural and organic food products, including macaroni & cheese, snack crackers, and fruit snacks.

Currently, a number of healthy lifestyle food companies are in the midst of completing sale processes to strategic or financial buyers, and, as a result, several more deal announcements are expected before the year is over. In addition, a few larger, high-growth players are contemplating public listings later this year or in 2014.

While each deal has its own unique characteristics, valuations are close to all-time highs in the better-for-you health market. For branded, fast-growing companies acquired by larger strategics with the expectation that meaningful synergies will be achieved, valuations can be in the range of 2x to 3x sales. In the case of private equity firms investing in new platform businesses, valuations are typically in excess of 8x earnings before interest, taxes, depreciation, and amortization (EBITDA)-and, in some cases, north of 10x. For companies that have been able to issue new shares in the IPO market, the median valuation multiple is over 13x forward-year EBITDA.

The outlook for the industry remains positive for the next 12 to 18 months. The macro tailwinds that are propelling the sector to new heights in 2013 are not expected to subside in 2014. On the contrary, the continued recovery of the U.S. and European economies will serve as accelerants to the growth of the industry. Given that 2013 got off to a slow start, 2014 should bring a larger volume of deal flow in this highly dynamic and evolving food and beverage category. Unfortunately for buyers, valuations are unlikely to come down any time soon. 

Author’s note: This is not a complete analysis of every material fact regarding any company, industry, or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider reliable, but we cannot guarantee the accuracy.