Strong Growth for Functional Foods

A robust financial market currently exists for functional-food companies across all facets of the industry, as functional ingredients, branded and private-label products, and marketers of functional foods all have prospered in the present environment. Mergers and acquisitions (M&A) activity in 2006 is up over 48% across these sectors, transaction multiples (a calculation of a company’s value) are increasing, public companies are generating strong returns and the initial public offering (IPO) market is open to performing companies. The markets this year have richly rewarded functional- food companies with strong fundamentals.

Today, a convergence of demographic trends are driving the growth of companies capable of developing and delivering products that conveniently provide energy, nutrition on-the-go, inner and outer health, and weight loss to its customers. Three major trends—the aging baby boomer, the obesity epidemic and a time-starved population looking for convenience— have converged, fueling the growth of the functional-food market.

The success of Hansen Natural (up 75% at press time), Senomyx (up 12%), NutriSytems (up 86%) and Jones Soda (up 85%) are clear indications that the consumer is demanding functional-food and healthy-oriented products and Wall Street is responding by driving up stock prices and growing market capitalizations.

Functional drinks have been the darling of the M&A market in 2006. Tata Group’s purchase of 30% of Glaceau Vitamin Water (Energy Brands, Inc.) at an estimated enterprise value of $2.3 billion was clearly the blockbuster transaction of the year. Less aggressive, but equally significant this year, were such transactions as: Naked Juice by PepsiCo, Jamba Juice by Services Acquisition Corp., and Robeks and Zola Açaí by Emigrant Capital. Strategic buyers are in the market for companies with growing, proven brands that can provide buyers with access and immediate scale in new “healthy” categories.

The growth drivers are in place for a robust 2007. Demographic trends continue to drive demand for new functional-food products. Growth creates interest from Wall Street, and public healthy-living companies have been significantly outperforming the overall markets over the last five years. If 2006 was any indication, 2007 is sure to be full of interesting surprises. 

David T. Thibodeau is managing director of the Investment banking group, Canaccord Adams, Boston, and head of the firm’s Consumer Health, Wellness & Lifestyle business, which specifically focuses on mergers and acquisitions, as well as public and private financings in North America and Europe.