The Big EASy

The sale of sports nutrition giant EAS is imminent, with possible suitors likely including other investors or major food companies.

By Adam Ismail

EAS, the sports nutrition giant and probably one of the highest-quality manufacturers in the industry, is now officially for sale. The New York Post broke the story and EAS confirmed it soon after. Because the company was acquired by Connecticut-based private equity firm North Castle Partners in 1999, one could argue that a divestiture was due. North Castle has held its position for five years in the company, which is about the length of time private equity firms start to look at converting their paper gains to cash gains.

North Castle would like to get about $400 million dollars for the company, which would represent a sizeable return to North Castle’s investors. Is this really feasible though? EAS reportedly had $340 million in sales last year and between $38-40 million in earnings before interest, taxes, depreciation and amortization (EBITDA), which is a proxy for how much cash it generates in its operations.

The first question to ask is how does that compare with other companies in the space? It is difficult to find an exact comparison, but Natrol, which has a significant portion of its sales in sports nutrition, was trading for around 16 times its EBITDA as we went to press. Some might say Weider would be a better example because more of its revenues come from sports nutrition. At its average price from the past year, Weider is trading for around six times its EBITDA. North Castle is looking for $400 million, or around 10 times EBITDA, for EAS. You could definitely envision a scenario where EAS’ size, margin and market position would allow it to trade at a premium to Weider. Could it sell for levels equivalent to Natrol? Probably not. Natrol is turning the corner, so its valuation is based on its future prospects, as its EBITDA is still relatively low.

The second question to ask is what is the company worth based on its growth prospects? North Castle says EAS is on track to have $1 billion in sales by 2008. That is over 24% annual sales growth per year. If we make some back-of-the-envelope calculations and assume that it can grow its EBITDA at that rate as well (which is a big assumption), to come to a valuation of $400 million, you would be assuming the riskiness of EAS’ cash flow is only 30% greater than the stock market. Depending on your opinion of its business, that may or may not be feasible. A conservative investor may say that is too low, but look at Natrol’s investors: at their current valuations they are only paying a 20% premium to the stock market’s risk (a beta of 1.2).

North Castle’s choice of investment banker is quite interesting and says a lot about where it feels it can capture EAS’ full value. The company chose UBS, which is a major global financial institution, but not one that plays even remotely in the nutrition arena. They are likely going to target the large food and private equity funds to which a bank that is more focused on this space would not have access.

The food players would be willing to pay a higher price for EAS than a nutrition industry company because the mainstream food industry tends to grow between 3-5% per year, and EAS offers them the opportunity to grow significantly faster. While EAS may still offer an attractive growth proposition to a nutritional player growing around 8% or more, the food companies will find it that much more attractive and be willing to pay a little extra for that growth. The other issue to consider is that there are not a lot of nutrition companies that cannot afford to pay $400 million for EAS, so it makes more sense to target the food industry where the bankers can leverage the critical mass to create value. After all, which will get you a higher price: an auction with two motivated bidders or an auction with dozens of motivated bidders with deep pockets?

At first glance one might ask why a private equity firm would be interested in buying EAS from another private equity firm, but believe it or not, it happens all the time. North Castle has already said EAS is on track to have $1 billion in sales in 2008, so that kind of growth is attractive to any private equity player. North Castle may indeed still have confidence in the growth prospects for EAS, but its investors get a bit anxious if they do not see their money after a few years, so it needs to cash out.

So the deal has not yet been struck, but look for it to happen soon. It certainly appears North Castle can get the deal price it is looking for, but in final negotiations, all kinds of things will change. The big question is, will it go to a Nestlé or Kellogg type of company looking for long-term value, or a more short-term oriented investor like a Ripplewood or the Blackstone Group.NW