M&A: Monster Deals Yielding Giant Premiums

WASHINGTONLate last year, Schwabe North America finalized an agreement to acquire the liquid supplements producer, Botanical Laboratories, for an undisclosed amount.

It was the right time to sell the privately held firm, said John Barrymore, managing partner of 6Pacific Group, which advised Botanical in the process.

Although the company had sustained growth, "companies reach a point in their lifecycle where they really need the resources of a larger partner to substantially grow their distribution, and Botanical Laboratories really reached that point," Barrymore said. "They really needed the sales and marketing resources of a big company like Schwabe to further expand their distribution."

Barrymore noted Botanical Labs received several offers. That is not unusual today in the supplement industry, at least when it comes to buyers fishing for a whale.

Flush with cash, private equity firms and other potential buyers are aggressively competing for an increasingly smaller number of monster acquisition targets, said Janica Lane, a partner with Partnership Capital Growth (PCG), a global merchant bank.

"With all of this capital and fewer deals, everybody is chasing after the same few deals, which tends to lead to strong valuations," she said.

Consider Nestle's recent $11.85-billion acquisition of Pfizer Nutrition, whose revenues are mostly in emerging markets. The deal, announced in April 2012, was the biggest sale in the nutrition business during a three-year period, according to data compiled by Bloomberg. Nestle is said to have outbid Danone, which reportedly offered $11 billion. 

The multiple on the dealreflecting the enterprise value paid for the company as a multiple of its revenueswas a whopping 5.6 (based on 2011 revenues), nearly four times the average multiple (1.4) across all sectors, according to Lane. Nestle paid nearly 24 times Pfizer Nutrition's 2011 earnings before interest, taxes, depreciation and amortization (roughly $500 million). 

"These are massive bids," Lane said, "and the deals are getting done."

The Pfizer Nutrition/Nestle deal is a reflection of the "abundance of available debt and corporate buyers decision to deploy their cash hoard to more aggressively grow through acquisition, given anemic organic growth," said Marco Galante, principal of J.H. Chapman Group LLC, an investment banking firm for the food industry.

Notwithstanding the higher valuations, Galante maintained economic uncertainty has contributed to the hesitance of business owners to put their companies up for sale.

"While liquidity abounds, so do a languishing and an uncertain economic climate uncertain fiscal policy, heightened by the growing federal debt, tax increases, and an avalanche of new regulations, amongst other factors, that has impacted on business sentiment and growth prospects," he stated.

Still, some big corporations are clearly bullish on the natural products sector. Reckitt Benckiser Group LLC is a case in point. The multinational consumer goods company, which is based in the U.K., agreed to pay $1.4 billlion for Schiff Nutrition International Inc., besting a previous offer from Bayer AG. Fast-growing Schiff reported net sales of $259 million for the one-year period ending May 31, 2012, and forecasted growth between 43 and 46 percent for its next fiscal year. In the first quarter of fiscal year2013, Schiff posted net sales of $85.1 million.

Tim Ramey, an analyst with D.A. Davidson & Co., an investment firm, referred to Reckitt Benckiser's offer as "an insanely high premium," according to The Wall Street Journal.

Such lofty bids may be a reflection of the fast-growing supplement business. Just ask Proctor & Gamble Co., which acquired New Chapter Inc. last year and is ramping up rather than trimming its workforce.  

Mergers often lead to lost jobs so companies can yield the "synergies" they promise investors. But P&G said that has not happened at New Chapter, the Brattleboro, Vermont-based company with around 300 employees.

"We have not laid off New Chapter employees," P&G spokesman Scott Popham said. "In fact, we are significantly investing in adding new people and resources in Brattleboro."

New Chapter has come a long way. In 2005, when 6Pacific Group invested in the company, it had about $25 million in revenues, Barrymore said. 6Pacific Group worked with New Chapter's management to quadruple revenues, and reached that goal in 2011, he said.

"When we got there, we decided to sell the company," said Barrymore, who declined to comment on the value of the sale, citing a non-disclosure agreement. "Our belief was always that our multiple would expand significantly once we hit the $100-million mark. That's kind of a magic number because now you have enough scale to do things in a more efficient way. You can buy media. You can effectively promote the products to a broad range of consumers. There's more money to utilize to do things."

P&G doesn't disclose New Chapter's revenues or projections for growth. But Popham said the company "has delivered at least consistent with category expectations."

Supplement firms that meet or exceed industry's expectations are likely to drive further interest from buyersenriching at least some investors who are ready to cash out.

"Really, all you can do is point to the fact companies are getting a lot more money these days for their businesses than they were five years ago," Barrymore said. "That's for sure."