Word from Wall Street: The Latest Acquisitions

Investment activity in the nutraceuticals market heated up in August.

By Adam Ismail

The old rule of thumb is that August is a quiet month in business, but it appears somebody forgot to tell the investment bankers in the nutraceuticals industry. Since the last Word From Wall Street column (July/August 2006), there has been at least five sizeable acquisitions totaling nearly $1 billion in new investments in the space! In this column, I will review these deals and dig deeper into the levers of value in each, in addition to their strategic implications.

Glanbia-Seltzer

Glanbia made perhaps one of the most interesting acquisitions when it bought Seltzer Companies for $105 million in early September. Historically, the company is known for manufacturing nutritional ingredients from dairy streams, but recently it seems to be expanding its strategy. For instance, in July it acquired Pro-Fibre Nutrition, which also stretched its competencies beyond dairy.

The Seltzer acquisition gives Glanbia access to formulation capabilities in the U.S., allowing it to offer similar services to customers on a pan-Atlantic basis. One thing is certain from the Seltzer and Pro-Fibre transactions, Glanbia sees a rosy future in selling solutions as opposed to just ingredients. Suffice it to say, Glanbia’s two latest acquisitions of companies that have mastered the solutions game gives the company a great deal of strength.

Omega Protein-Zapata Stake

Zapata Corporation, which is controlled by the family of billionaire-financier Malcolm Glazer, was the largest shareholder in Omega Protein and has been trying to sell its stake since December last year. Presumably unable to find a more attractive deal, Omega Protein has instead decided to acquire Zapata’s stake, effectively entering into a stock buyback program.

Zapata owned 58% of Omega Protein and will only sell 36.8% of the company under the terms of the deal, but the company has the option to buy any remaining shares held by Zapata in nine months at a price of $4.50 per share.

It is important to note that Omega Protein is taking out $45 million in new debt to finance the $45.7 million purchase, which is more than double its current level of debt. However, the company says the deal will be accretive to earnings in the near future, presumably because it is acquiring the shares at $5.10 and it is currently trading in the market at just above $6.50. What is significant about this transaction is that it frees Omega Protein up to execute on its strategy without the distraction of a transaction hanging over its head.

IdeaSphere-Pharmaton

IdeaSphere is a fascinating company, kind of like the Warren Buffett of the nutritional space. Right now it is in an acquisition frenzy where it is acquiring some valuable brands in the space that seem to be underappreciated by others. The Pharmaton acquisition gives IdeaSphere a lot of potential synergy be-cause of its strong European presence. To date, most of the IdeaSphere acquisitions have had strong U.S. presences, but relatively little outside the U.S. The product portfolios appear to be complementary, so it would not be difficult to see a time when the IdeaSphere brands like Twinlab, Metabolife and Dr. Weil are suddenly popping up with significant distribution in Europe. When that happens you can be sure Idea-Sphere is extracting maximum value from the deal.

Nutrition 21-Iceland Health

Similar to the Glanbia acquisition, this deal seems to firmly pull Nutrition 21 in a new strategic direction. The company has never been too far from a consumer brand, having built the Lite Bites business in the 1990s, but this sizeable deal gives them a whole new outlook.

Nutrition 21 generated $8.1 million in revenues over its last four quarters. Iceland Health on the other hand had more than triple that amount, pulling in $26 million in revenue.

Iceland Health is a significant consumer business that uses direct response television ads to sell its omega 3 supplement. Where this deal provides significant opportunity for the companies is by taking Nutrition 21’s chromium picolinate products into direct response and Iceland’s omega 3 into retail.

Nutrition 21’s chromium picolinate products have gained a loyal following in the retail channel today, but it took a lot of consumer education to bring new consumers in, and the retail channel does not lend itself well to this. Iceland Health, however, has quickly established a known brand entity through its television advertising and can conversely benefit by extending that brand to the retail shelf and prompting purchases from consumers who would not normally call a toll-free telephone number to buy a product.

The price tag on this deal is currently around $16 million, but it has the potential to be much greater with earnout payments and stock options.

Tata-Glaceau

In perhaps the largest deal the industry has seen in some time, the Indian conglomerate Tata Group took a $677 million stake in Glaceau, the minds be-hind the Vitaminwater brand. Incredibly, the investment will only give Tata 30% of the company, valuing Glaceau at over $2.2 billion. The Tata Group may be unknown by many consumers, but it has a significant consumer coffee and tea business, including the Tetley Tea brand. The Tata Group acquired the stake from another investor in the business, TSG Consumer Partners, but also agreed to provide the company with the financing it needs to continue its growth trajectory.

Glaceau said it has had a compound annual growth rate (CAGR) of 200% per year since its inception, but even if you are making very large margins, that kind of growth requires a lot of working capital. If this deal gives Glaceau that capital and enables them to continue its growth, the investment by the Tata Group will seem like a bargain. (See more information on Glaceau in this month’s Functional Beverage Update on page 42.) NW

Disclaimer: The opinions expressed in the article are those of the authors and do not represent the opinions or advice from Cargill.