The Atkins Acquisition

Private equity firms continue to see the value in the health and wellness sector, which bodes well for future investment activity.

ByAdam Ismail

Any trip to a mainstream grocery store will tell you that food companies were banking on the low-carb craze sticking around for a while. Almost every major food brand has a low-carb line, but as IRI and AC Nielsen data show, the low-carb craze appears to be just another bubble that has finally burst. On the heels of that news, two respected private equity firms, Goldman Sachs Capital Partners and Parthenon Capital, announced they were acquiring Atkins Nutritionals, the King of low-carb living. Do they see some nugget of value that is hidden to the rest of the world?

Atkins is a unique company because it made its name on the back of Dr. Robert Atkins’ famed low-carbohydrate diet program, but made its money on the items branded with the Dr. Atkins name. However, Parthenon said it sees much more than just branded product sales, it sees a solution to America’s weight and diabetes epidemics. No company can be reasonably expected to solve the crisis on its own, but the deal was worth an estimated $600-800 million, which means it needs to make some decent headway for its new owners to make some money out of the deal.

America’s poor health is a fascinating place to find value, and as anybody who has been watching Wall Street knows, private equity firms are the ones trying to capture that value. I have written about many of these deals, but to put it in perspective, since 2002 private equity firms have paid over $4.2 billion to acquire companies in our sector. Are these firms off their rockers? Probably not. If you had invested in a portfolio of nutritional products companies at the beginning of 2002, you would have earned somewhere between 2.75 and 3.25 times your original investment.

So what are Goldman Sachs and Parthenon going to do to make money in Atkins? First, they heavily leveraged the company in the acquisition and are going to create value simply by using free cash flow to pay down the debt. Nearly $300 million of the purchase price was financed with a debt package placed by UBS. This is not a new trick. In fact, it has been the secret of leveraged buyout firms for years.

Parthenon also alluded to its strategy for Atkins: to continue educating the U.S. population about controlling their carbohydrates to manage their weight. Atkins is not going to give up on this and as we enter the holiday season, they are already attacking the media outlets getting on every magazine cover they can. What better time than that in which Americans gorge themselves to convince them to start watching what they eat?

Along the lines of educating the masses, Atkins will continue to push products that get the word out, like its line of cookbooks, calendars and educational books. Informational products are a key component to its strategy and help them communicate the value the company feels it brings to consumers.

Finally, Atkins has been in the majority of natural food stores for a while now, but they still have a lot of progress to make with the mainstream retailers. Out of all the low-carb diets out there, Atkins has the most powerful brand. In fact, most people who aren’t on the diet even know what the Atkins diet entails. That is valuable to mainstream retailers because they have to worry less about products not moving well on the shelves.

Regardless, Goldman Sachs and Parthenon have a lot of work ahead of them in terms of bucking the low-carb crash. Look for Atkins to continue to innovate how it communicates its message and look for new product categories as it continues to leverage its brands. Their new investors are counting on growth and they have to find new ways to deliver it.NW