Adam Ismail07.01.04
Word from Wall Street: Private Equity Interest In Nutritional Companies
Private equity firms increasingly see the value creation in nutritional companies, which may lead to a brighter future.
By Adam Ismail
Value creation is one of those typical management buzzwords you always hear, but what it really means in concrete terms is difficult to pin down. What is easy to see is that a lot of value was destroyed in the supplement industry between 2000 and 2003. Merger and acquisition deals were completed at much lower valuations, growth forecasts were cut, and the market capitalization of public companies in the nutrition industry plummeted. So how do we know when we have turned the corner and value is being created again?
If you have been watching the quarterly earnings reports coming out, you might think the industry is starting to recover. Many companies have now restructured and are reporting net income and revenue gains, but certainly not at the level they were before the fall. One indicator that looks promising, however, is the level of interest from private equity firms. Their job is to buy up undervalued companies and resell them at a proper valuation—essentially they are identifying value.
One piece of promising data is that they are increasingly interested in this space, meaning they see value creation in nutrition companies. Private equity firms have recapitalized Leiner Health Products and acquired General Nutrition Centers, Shaklee and many more, all within the last six months. They clearly see a “mispricing” in the market.
The mispricing is so large that in the case of Apollo Management, less than six months after acquiring GNC, it is already preparing to sell its shares in an initial public offering (IPO). Apollo seems to have purchased the company right at a key point in its turnaround and is essentially letting GNC progress down the recovery path to where Apollo can sell it. Nobody knows for sure what role Apollo has taken in the day-to-day business of GNC, but it makes you wonder if Numico could have sold it for a lot more by holding on to it for six months.
In the case of Leiner, North Castle Partners initially put the company up for sale, according to various media reports. Somewhere along the line it happened upon Golden Gate Capital and structured a deal that allowed it to keep a significant stake in the company, while still giving its original investors the opportunity to realize a 17% annual return. That is a pretty good return when you consider the S&P 500 only returned around 6% during the same time period. Clearly North Castle saw the value back when they made the investment in 1997 and see it again now.
Ripplewood Holdings and Activated Holdings acquired Shaklee, long the network-marketing darling of Yamanouchi Pharmaceuticals, for over $310 million. The announcement of the deal contained subtle signals that the new owners were going to focus the company on what it was essentially already doing—providing high quality health and wellness products via its strong distribution network. Again, it recognized the value in the core activities of the company.
Clearly these are all larger companies in the industry, but it is still a good indicator that private equity money is interested in these deals. Philips Health Publishing is also rumored to be on the block right now for around $250 million, and it has retained JP Morgan Chase for the potential deal. Between the hefty asking price and its choice of banker, Philips may be clearly targeting the private equity investors, so look for more action yet in this space. Also, because this is a leading indicator of recovery, look for even more value creation.NW