Here Today, Gone Tomorrow

Taking a look at mergers and acquisitions in the nutraceuticals space and how they have shaped the industry of today.

By Adam Ismail

The level of merger and acquisition activity in the nutrition space is slowly picking up again, but the remarkable thing about the past couple of months is how the deals seem to be involving the top players in each sector. Perhaps it is time to step back and take in how different the space will be once all the deals are closed.

Retail

Royal Numico’s sale of GNC is probably the biggest deal being discussed at the moment. Although the sale of GNC was widely expected, Numico had been saying for a year that it would not making any decisions on selling the company until Spring 2004, effectively giving GNC a year to turn itself a­round. However, despite all reports that GNC was indeed turning around, Numico sold it off anyway.

The question is, did Numico give GNC an unfair shake? Who knows, but when the company started to turn around, its value started to increase and provide more assurance to potential investors that the business was strong. After it hired Goldman Sachs to handle a “potential” auction, it suddenly be­came apparent how valuable the business was (although it was still worth much less than what Numico acquired it for) to the investing community when private equity and leveraged buyout firms lined up to put in their bid. Numico ended up selling the business to Apollo Management, an American private equity firm run by Leon Black. Mr. Black made millions as the head of mergers and acquisitions at Drexel Burnham Lambert, using Michael Milken’s junk bond financing arm to fund some of the biggest deals of the 1980s, and also some of the most hostile ones.

As we went to press, the deal had not yet closed, but management has already been shaken up. Michael Meyers is on his way out and the new CEO of GNC will be Louis Mancini, a key figure in its past and one that was brought in to help turn the company around.

What this does for the space is not immediately clear yet, but one thing is for sure, there will be a bigger emphasis on cost cutting at GNC, a focus on higher margin products and a bigger push for innovation in the space.

Supplements

Two major supplement brands have been acquired in the past few months in this space, which has left a lasting impression on the industry. Idea­Sphere’s acquisition of Twinlab signaled the end of the fall of a nutrition powerhouse. Twinlab has been a key player in the sector for many years, but operational issues and industry scandals eventually overwhelmed them.

IdeaSphere seems to represent a fresh perspective, bringing in a very strong management team that includes the founders of Amway and Anthony Robbins, the widely popular self-help guru. They will almost surely take Twinlab away from its focus on traditional retailers to instead focus on innovation and increasing margins.

NBTY’s acquisition of Rexall Sundown, another Numico holding, signaled the end of an era in another way. NBTY has become adept at integrating acquisitions into its highly successful operations and has already indicated that it will layoff Rexall staff. Rexall had heavily invested in R&D in the past and was focused on developing blockbuster products, many of which had short lives. However, NBTY operates very differently and will scale back the Rexall way. Rexall was not particularly seen as an innovative brand by consumers, so NBTY’s new model will help significantly boost margins in its business.

Natural & Organics

Even the organic side of the nu­traceuticals business has been active with SunOpta, formerly known as Stake Technology, acquiring companies right and left. Not many people realize it, but Stake will end the year with almost $200 million in revenues, a very large sum for organic foods. The company is now a major player in soy foods, natural ingredients, natural and organic snacks, and now even in Sunflower products.

The company does not have the brand recognition that many Hain Celestial products have, but the company has its fingers in a number of pots and actually supplies much of Hain’s soymilk base. The company’s vertically integrated business model for organics seems to be paying off.

Dean Foods, which has always dabbled in the natural and organic food sector, is now out in full force. In addition to its White Wave acquisition last year, it jumped in and acquired the 87% of Horizon Organic that it did not own. Dean will likely give Horizon as much independence as it gave White Wave, but it changes the structure of the industry because now almost all of the leading consumer brands are part of larger groups. The competition will continue to get more sophisticated and as a result there will be more pressure from the mainstream food space. The big food companies are already be­coming increasingly healthy with the trans-fatty acid debate pressuring them to change their ways—all this means is that they will be targeting healthier foods as competition now, and no longer as just an ancillary investment.

Summary

Three years ago when you asked people who the leading brands were, almost all of the acquisitions listed in this article were going in different strategic directions. The deals in the nutrition industry have helped shape how competition is changing and how companies’ priorities are shifting. Who would have thought Rexall Sundown and GNC, the two largest companies in the industry, would have been bought and sold twice? Who would have thought that with the industry growing at double digit growth rates, it would be more difficult to launch a new brand in the organic food space? Who also would have thought one of the largest and most innovative brands in the whole space would have gone bankrupt? That all has come and gone now, so you have to think where will the industry be three years from now? What will NBTY have done? Will Stake be competing head-on with Hain? Only time will tell.NW