Natural Products Insider

JUL-AUG 2019

INSIDER is the leading information source for marketers, manufacturers and formulators of dietary supplements, healthy foods and cosmeceuticals. Since 1997, INSIDER has been serving the needs of the global nutrition industry.

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42 INSIDER July /August 2019 punctuated by Nestlé's acquisition of Atrium likely infl ated some perception of value in a number of companies that perhaps would have sold last year but didn't get their price. INSIDER: How does M&A in the supplement category compare to other sectors? Smith: The supplement industry does not have the market concentration one would see in nonalcoholic beverages, beer or other concentrated industries. There are fewer major brands, and those brands have less equity than one sees in adjacent consumer categories. This means there are fewer obvious acquirors for growing businesses. INSIDER: What role are private equity acquisitions playing? Ferrier: Private equity has a growing infl uence in the supplement industry, as it has across many sectors of the economy. KKR's acquisition of Nature's Bounty of course was a headliner, and while KKR didn't have an explicit strategy to enter natural health or consumer health as one of the most famous buyout and private equity fi rms, it has a broad portfolio of industries it is interested in. Recently, we've also seen Nutraceutical International taken private by a private equity fi rm, HGGC. Swander Pace has made investments in Swanson—a leading mail-order supplement business—and Nutritional Medicinals. North Castle, one of the early investors across the broader nutrition and natural products industry, invested in SmartyPants and sold its Doctor's Best Supplement brand to a Chinese company back in 2016. Chinese acquirers have been more active in North America in recent years with the major $700 million acquisition of Iovate— also in 2016, but a signifi cant transaction. And there was the acquisition of Australian supplement company Nature's Care in 2018 by a consortium backed by Chinese government investment. INSIDER: How do private equity acquisitions compare to strategic ones? Smith: Low interest rates, a relatively stable U.S. and global economy, and elusive growth have led to a heavy appetite to grow through acquisition. This is true for strategics and private equity-type investors. Generally speaking, strategic acquirors are able to pay a higher multiple to sales or EBITDA [earnings before interest, taxes, depreciation and amortization], as they see synergies available by folding the smaller business into its operations. I must note, some private equity companies act in the same way, as they have big platforms in the VMS [vitamins, minerals and supplements] space and add smaller businesses with an eye toward doing the same thing. Strategic investors are often public companies and as such have the risks associated with answering to public investors and the media. In a traditional view, private equity/ venture capital fi rms can take more risks, in part because they are out of that spotlight. INSIDER: How did HGGC's 2017 acquisition of Nutraceutical International Corp. compare to Clorox's 2018 acquisition of Nutranext? Smith: We think it is notable that both of these major transactions resulted from rollup strategies which seem to have grown out of some of the industry dynamics we discussed earlier, but were executed along very different timelines. Nutraceutical Corp. was built over the course of decades through a consistent use of a rollup strategy implemented in well over 30 transactions. Management was able to create scale and synergies by benefi tting from the fragmented nature of the industry. While Nutranext was also created by rolling together several brands, scale was created in far less time and in far fewer transactions. While the "velocity" was different—and perhaps a result of these trends accelerating in recent years—the implication may be that the ability to create enterprise value through M&A activity in a fragmented industry may still exist in the supplement landscape. INSIDER: Any comments on notable 2018 M&A supplement activity or other big players? Ferrier: Some notable transactions from major global players in 2018 included Procter & Gamble acquiring Merck's consumer health brands, which mostly include supplement brands in Europe; and Clorox buying Nutranext, as probably the second-largest available company to acquire after Atrium.¥¥ For both of these companies, these were additional plays in the supplement market, as Procter & Gamble acquired the natural channel brand New Chapter previously, and Clorox had acquired Renew Life, a leading probiotic supplement company. Other big players remaining in the game and keeping the mainstreaming of supplements healthy are RB¥[Reckitt Benckiser] buying Schiff a few years ago, and Pfi zer buying Alacer, as well as ongoing European acquisitions by Bayer.¥It is no secret that¥Pfi zer was looking to sell its supplement lines, but that transaction didn't come to pass. INSIDER: How is 2019 looking so far? Ferrier: 2019 hasn't quite taken off in terms of numbers of transactions in supplements, but there are some notable acquisitions with Unilever buying OLLY, and a $25 million investment in Ritual, and a few cannabis and CBD companies using their newfound capital to buy supplement brands in the United States. An important trend to note here is that Unilever buying in to supplements—in this case, mostly gummies—added to Nestlé's buying into Atrium, which was mostly pills, is an indicator that the world's biggest packaged food and packaged product companies and consumer goods companies are making a long-term bet on supplements. And notable is that executives from both companies told me as recently as two or three years ago that they would never buy into the pill business. M&As

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