Adam Ismail07.01.11
There is a wave of economic pessimism dominating financial markets today, coupled with a raging debate about whether or not we are about to enter a double-dip recession. The last time we were in this situation, toward the end of 2007 and beginning of 2008, the merger and acquisition (M&A) markets froze up and deals were abandoned. In the nutrition space today, however, some key strategic deals are still being completed.
The Schiff-Ganeden Deal
While the nutrition industry may not buck the trend of the broader economy, at least as M&A deals are concerned, a recent deal from Schiff Nutrition International is a good reason to be optimistic about the near future.
On June 3, Schiff announced it was acquiring the Sustenex and Digestive Advantage brands of supplements from Ganeden Biotech. Along with the two existing brands, Schiff also received exclusive worldwide rights to the use of Ganeden’s BC-30 strain of probiotics in dietary supplements. The two brands generated $17 million in sales during 2010, but Schiff paid $40 million in the acquisition. While it may sound like a steep valuation, there are plenty of strategic reasons this deal may pay off. In fact, Schiff said it expects the acquisition to be accretive to its earnings nearly immediately.
One of the fastest growing trends in the supplement industry is the use of standalone brands, separate and distinct from a company’s leading brand. Compared to other industries, loyalty to umbrella brands in the supplement space is relatively low, so broad-line supplement brands often end up competing on price in the mass market and even the natural foods channel.
Standalone brands allow companies to create additional value by leveraging a company’s existing access to shelf space, with a more tailored marketing program that highlights the unique benefits of the product. Schiff has two extremely successful examples of success with this model in its portfolio—the Move Free joint health supplement and the MegaRed krill oil supplement. And brands like Sustenex and Digestive Advantage fit nicely into this model.
In addition, the main product categories in the industry today that have achieved high penetration in all channels are multivitamins, omega 3s, glucosamine/chondroitin, probiotics and vitamin D. However, because these are primary categories, it seems like nearly every company in the industry is active in these categories. The challenge for companies competing with these products is to create some sort of lasting differentiation, which has always been an issue in the supplement space. Unique marketing and branding represent some of the ways companies are differentiating themselves.
In examining its portfolio of brands, which is built on a platform of ingredients, probiotics represent a missing link for Schiff. So in addition to already knowing how to run a multi-brand portfolio, Schiff has added a complementary product to its lineup.
There is more potential value for Schiff, though. Ganeden is primarily an ingredient manufacturer that has been successful in licensing its proprietary probiotic technologies into applications around the world. As such, the costs of managing two retail-branded supplement products is much more expensive for Ganeden than it would be for Schiff. This is because Schiff already has broad access to shelf space across the country, an existing marketing operation setup for supplements and a retail-oriented sales force.
For Ganeden, generating $17 million in sales from two brands is admirable, but Schiff will likely be able to take these brands to new levels. Further, Ganeden sweetened the deal by adding the proprietary rights to its patent portfolio for the supplement industry. So as these brands grow, Schiff will have access to unique technologies that will serve as a platform for new product development, and that others will find difficult to replicate.
In the end, Schiff paid $40 million for a $17 million line of products that has unique differentiation from strong branding, a complementary product line and strategy, potential for much greater market penetration, and ready-to-go technologies for new product development.
All of these extra benefits made Schiff feel confident there was more strategic value and upside to this deal amid a potential downturn of the economy. And Schiff has said it has plans for future acquisitions, so similar deals in other categories will probably follow soon.
The Schiff-Ganeden Deal
While the nutrition industry may not buck the trend of the broader economy, at least as M&A deals are concerned, a recent deal from Schiff Nutrition International is a good reason to be optimistic about the near future.
On June 3, Schiff announced it was acquiring the Sustenex and Digestive Advantage brands of supplements from Ganeden Biotech. Along with the two existing brands, Schiff also received exclusive worldwide rights to the use of Ganeden’s BC-30 strain of probiotics in dietary supplements. The two brands generated $17 million in sales during 2010, but Schiff paid $40 million in the acquisition. While it may sound like a steep valuation, there are plenty of strategic reasons this deal may pay off. In fact, Schiff said it expects the acquisition to be accretive to its earnings nearly immediately.
One of the fastest growing trends in the supplement industry is the use of standalone brands, separate and distinct from a company’s leading brand. Compared to other industries, loyalty to umbrella brands in the supplement space is relatively low, so broad-line supplement brands often end up competing on price in the mass market and even the natural foods channel.
Standalone brands allow companies to create additional value by leveraging a company’s existing access to shelf space, with a more tailored marketing program that highlights the unique benefits of the product. Schiff has two extremely successful examples of success with this model in its portfolio—the Move Free joint health supplement and the MegaRed krill oil supplement. And brands like Sustenex and Digestive Advantage fit nicely into this model.
In addition, the main product categories in the industry today that have achieved high penetration in all channels are multivitamins, omega 3s, glucosamine/chondroitin, probiotics and vitamin D. However, because these are primary categories, it seems like nearly every company in the industry is active in these categories. The challenge for companies competing with these products is to create some sort of lasting differentiation, which has always been an issue in the supplement space. Unique marketing and branding represent some of the ways companies are differentiating themselves.
In examining its portfolio of brands, which is built on a platform of ingredients, probiotics represent a missing link for Schiff. So in addition to already knowing how to run a multi-brand portfolio, Schiff has added a complementary product to its lineup.
There is more potential value for Schiff, though. Ganeden is primarily an ingredient manufacturer that has been successful in licensing its proprietary probiotic technologies into applications around the world. As such, the costs of managing two retail-branded supplement products is much more expensive for Ganeden than it would be for Schiff. This is because Schiff already has broad access to shelf space across the country, an existing marketing operation setup for supplements and a retail-oriented sales force.
For Ganeden, generating $17 million in sales from two brands is admirable, but Schiff will likely be able to take these brands to new levels. Further, Ganeden sweetened the deal by adding the proprietary rights to its patent portfolio for the supplement industry. So as these brands grow, Schiff will have access to unique technologies that will serve as a platform for new product development, and that others will find difficult to replicate.
In the end, Schiff paid $40 million for a $17 million line of products that has unique differentiation from strong branding, a complementary product line and strategy, potential for much greater market penetration, and ready-to-go technologies for new product development.
All of these extra benefits made Schiff feel confident there was more strategic value and upside to this deal amid a potential downturn of the economy. And Schiff has said it has plans for future acquisitions, so similar deals in other categories will probably follow soon.
