Adam Ismail07.01.10
Given all the drama in the news about how the world is on the verge of economic collapse, the fact that some notable names in the nutrition industry have been involved in equity investment, merger or acquisition transactions during the last six months could have easily been missed. These include such high profile companies as Amerifit, FRS, Sturm Foods, Sweet Leaf and Tree of Life. So does this mean life is returning to normal in the secondary equity capital markets?
Data from the Nutrition Capital Network sheds some interesting light on this question. The group tracks private equity investments, mergers and acquisitions and IPOs for companies in the health and nutrition industries. At first glance, April and May have shown significant rebounds in overall activity. What is interesting is that the peaks and valleys actually correspond very neatly to when the S&P 500 stock index peaked and bottomed out. This is likely just a coincidence because the value of public stocks should logically not correlate to the number of private capital transactions. However, on a monthly basis it may be indicative of how the private capital markets are taking their cues from the public markets. This may translate into private valuations as well.
Within the data there are some other interesting trends. First, nearly all of the activity has come from the natural, organic and functional foods sides of the industry, averaging between seven and eight transactions per month. The supplement industry, on the other hand, has been quiet, averaging slightly more than two transactions per month. This may be a reflection of the perception that the supplement space is currently a high-risk investment. There is a new regulatory regime that appears to be taking a much harder line on supplement-related issues, potentially making a new investor think twice about the market.
The food and supplement spaces are very different in their dynamics. For example, it is much harder to create differentiation in supplements because most of the innovation is taken on by ingredient manufacturers who in turn sell their innovations to your competitors. In the food space, creating a unique brand identity is the primary method of building businesses, a model that has not worked in most cases on the supplement side. All of this increases the business risk of supplement companies, and when risk increases it has the dual effect of pushing valuations down and slowing the flow of capital into the space. One could easily argue that the food space is just as risky, but perception often trumps facts in investing. For instance, a substantial number of transactions have taken place in the trendy beverage categories of energy drinks, coconut waters and smoothies. These categories are notorious for risk because while the costs of entry are so low, only a handful of companies have figured out how to meet consumers’ desires.
Another way to look at the data is by the types of transactions being completed. There has been a steady stream of private equity deals in the industry, averaging between four and five per month during the past year. The companies receiving these investments represent a mix of well-established companies and small startups. This is a positive sign for the industry because it means the people who control the money believe in the long-term prospects for the industry—private equity investments typically have a longer investment time horizon compared to public equity investments.
Merger and acquisition activity has been relatively stable, but still at smaller volumes than before the recession started. However, many of the transactions being completed are on larger companies rather than the small-to-medium-sized companies that would signal that the M&A market is rebounding. These big names include Inverness, Elan Nutrition, Garden of Life, Tree of Life, Balance Bar, Airborne, Amerifit, etc. Normally that would be a healthy sign, but in the supplement space the large companies accounted for 11 of the 13 deals completed last year.
So the good news is the markets are not dead and there are still investors out there looking for unique, valuable companies. The less-good news is that it is still too early to tell whether or not the private capital markets are rebounding, particularly in sectors like supplements, which are perceived as high risk.
