The Consolidator

Reviewing the recent acquisition activities of SunOpta and what lies ahead.

By Adam Ismail

In every industry there are a few companies viewed as consolidators that embark on long campaigns of acquisitions. In this industry some of the best known include NBTY and IdeaSphere. About two years ago this column featured a story on one such consolidator, SunOpta, formerly Stake Technology Corporation. At the time, this mini-conglomerate had three operating units: foods, environmental industrial, and steam explosion. The company has been active again in the last few months, with its acquisitions of Quest Vitamins, Hess Food Group, Purity Life and Bimac Corporation. So it seems like a good time to revisit the company.

Since March of 2004, SunOpta has made 16 acquisitions in natural foods, averaging one every other month. That puts them on track to make one more acquisition between the writing of this article and the time this issue of Nutraceuticals World winds up in your mailbox. These acquisitions have changed the company structure and focus—this is definitely not the same SunOpta we saw at the beginning of 2004.

Then and Now

First of all, SunOpta’s core food business, which focused on producing grains and soy, fiber ingredients, and distributing natural and organic consumer products, now includes a large organic fruit production business. In addition, the company has taken steps to optimize its businesses by consolidating its manufacturing and distribution businesses into fewer facilities. SunOpta’s strategy is to play in nearly all parts of the natural and organic value chain, so over the past couple years it has made acquisitions that will get it closer to farmers, as well as retailers, while growing its manufacturing and production capabilities. The market has helped support this due to the rapid growth in the popularity of organics in the mainstream. In fact, the company even has contracts that supply one of the world’s largest mainstream retailers with private label soymilk.

Three years ago, the food business was generating cash and it seemed like a good time to spin off the Environmental Industrial business, which had supported the development of the food group with its cash flow. That business is now called Opta Minerals and has actually had its own IPO. Opta Minerals is now pretty much independent, even though SunOpta still owns a bit more than 70% of the company and also continues to grow through acquisitions.

The Steam Explosion business was truly a developmental business three years ago, and actually has a very different story from the other businesses within SunOpta. Even though it was in development, the steam explosion unit was actually the first business in the company, dating back to 1973. The business centered on the use of a steam explosion technology for food processing and pulp production until recently when the technology was applied to producing cellulosic ethanol. Suddenly this business is gaining critical mass and could see its own IPO in the future too.

Performance

If you bought shares in SunOpta three years ago, you would be sitting on a nice little profit of about 50%, but you probably also experienced some pain along the way. The shares went through a fairly steady decline from January 2004 through February 2005. This is important to note because in that time period they acquired five small distributors of organic foods and fruits and a large oat fiber facility. All of these acquisitions take capital and the company has to demonstrate a return on that capital. Companies always cite synergies as ways they will create value in acquisitions, but often much of that synergy is intangible and difficult to pin down. However, in February 2005, the exact point at which SunOpta’s shares began to turn around, they opened a very large distribution center in Canada and began consolidating all of the natural foods distributors they had acquired into a central operation. This was ultimately a realization of the synergies from consolidating the distributor space.

The challenge for companies that have businesses focused in different areas is how you create value across the segments. SunOpta, it seems, has been consolidating with a plan in mind. They were extracting only minor synergies from all of their distribution acquisitions, but then took the big steps of building and expanding more central fac-ilities. This almost seems like one-time value creation, so the question is how will they continue to create value on an ongoing basis. Additional distribution acquisitions can be to be plugged into the existing infrastructure, but that facility is located in eastern Canada. The com-pany’s fruit production unit is located in California, so perhaps building a similar a western North Amer-ica distribution center is in the cards. There are also plenty of small European distributors that could be good targets for an overseas expansion. Regardless, we should wait a couple months to see if the company makes another acquisition move.NW