Two recent releases from the Nutrition Capital Network paint a variegated picture of M&A and investment activity in the natural products business: Big fish have eaten many of the medium size fish, but there are plenty of smaller fish left in the tank waiting to be fed.
A number of huge deals have been completed recently, the group said, but overall M&A activity seems to be cooling off. Nevertheless, financing activity among firms in the lower tier of the industry remains strong.
NCN, a group that brings smaller companies together with potential investors (or buyers) in carefully orchestrated events, recently released a list of the top 15 transactions in the natural products business so far in 2012.
Three of the top deals involved supplements: Schiff bought Airborne; Procter and Gamble bought New Chapter and pharmaceutical giant Pfizer bought Alacer. Two others involved ingredient suppliers: DSM bought Ocean Nutrition Canada while Stauber snapped up Pharmline Inc.
Most of of the buyers were large CPG companies like P&G or Dole or pharma juggernauts like Pfizer. Does this mean the big boys are coming into the space with greater alacrity?
Grant Ferrier, co-founder of NCN, told NutraIngredients-USA: “I think that they are. I wouldn’t say it’s new, though. It has been going on for more than a decade.
“First, the M&As are getting bigger; second, more and more players are coming to the table each quarter like P&G and Dole; and third, natural & organic and healthy foods are increasingly a competitive battleground for the world’s largest food companies. In addition, we are seeing an increased interest over time in companies across the supply chain, including ingredient and manufacturing companies, indicating that investors are becoming more strategic in their approach to the industry.”
Part of the activity was driven by a need to latch onto innovation. Big companies have a lot advantages, such as the huge distribution network P&G brought to the table when it bought New Chapter. But they bigger they become, the harder it is to innovate.
“Most big companies will freely acknowledge that internal innovation of new brands rarely happens. They don’t have the culture to create internal entrepreneurs. There are not a lot of advantages to risk taking in a big company,” Ferrier said.
“That entrepreneurial spirit that drives a lot of these smaller companies is where the innovation occurs.”
Beneath the level of the top deals, though, M&A activity has cooled off, according to NCN’s data. But at the same time, the amount of investment in smaller companies NCN has seen in its events remains strong, even if fewer companies end up getting bought outright. What’s going on?
The supplement business is small compared to food, Ferrier said. And even if you expand the field to include health and wellness or other sectors, it’s still quite small compared the whole universe of big food which approaches $1 trillion. The move of these giants into the sector has depleted the number of $100-million companies available to buy. Even companies in the $20-million plus range are getting scarce, and the big CPG firms will rarely purchase a smaller than that.
But there are a plethora of smaller firms coming into the market, and investors seek to hook their wagons to the next one that becomes a $100-million star. For example, as many as 90 companies applied to be part of NCN’s next event on Oct. 15 and 16 in San Francisco where entrepreneurs get 10 minutes to pitch their company to potential investors. Only 18-22 will make the cut.
“One of our guiding missions, one of the reasons why NCN exists, is the buyers and acquirers and investors all want to be the next generation, and as the competition has heated up to be part of that next generation the desire to know (these companies) earlier has heated up.”
Cause for optimism
Ferrier is bullish about the ability of the industry to create that next school of $100-million fish. He laid out three factors that will underpin further strong growth:
- Consumer knowledge and education will continue to grow, creating a strong base and demand for products that support health and wellness.
- Support for prevention and wellness will continue to weave its way into the health care system. It may not mean Medicare will pay for your supplements, but many private health care cost managers already include supplements or other health aids in their cost-containing wellness programs, a trend that Farrier only sees increasing.
- The big food and pharma companies are on board with the idea that products that encourage positive lifestyle choices and that support health are where their growth and market share is going to come in the future.
“All of those factors will continue to pace the growth in what we call the health and wellness sector. I would see at least twice the economic growth (growth in the national GDP), or as much as three or four times in some sectors,” Ferrier said.