David Thibodeau, David Thibodeau

October 30, 2013

5 Min Read
Blockbuster VMS Deals

The VMS (vitamins, minerals, supplements) gold rush continues as formerly unlikely strategic and financial buyers pay premiums to acquire or invest in companies across the VMS value chain. What is attracting these players to the category, why are they finding this industry so attractive and, most importantly, if you are considering a liquidity event, how should you be positioning your company to maximize shareholder value? Before we dive into these areas, lets review some of the more recent and significant transactions in the VMS sector.

Notable Transactions

During the last 24 months, we have seen the VMS sector (including ingredients) lead the overall healthy living sector in transaction (merger and acquisition) multiples with average revenue multiples of 2.4 times and EBITDA (earnings before interest, taxes, depreciation and amortization) multiples a whopping 19.9 times. The median multiples over this time are equally as impressive at 2.3 times revenue and 11.1 times EBITDA.

Some of the more notable and head-turning transactions include the Reckitt Benckiser USD $1.4 billion acquisition of Schiff Nutrition with industry leading multiples of five-times revenue and 33-times EBITDA. What makes this an exceptional transaction is that Reckitt topped the deal that Bayer had negotiated with Schiff only weeks before. One can only wonder how much due diligence and strategic assessment Reckitt undertook before its eleventh-hour bidtime will certainly tell. From an industry perspective, we very much hope Reckitt can make this acquisition a success. We must also wonder where Bayer will strike next knowing it has a significant acquisition war chest and has made it clear this is a space it wants to enter in a big way.

Next on the list of notable transactions is the Church & Dwight acquisition of Avid Health. This transaction is more notable from a strategic perspective, with a household cleaner products company buying a VMS company, than a multiple perspective, although still very aggressive at almost three times revenue and more than 11-times EBITDA. This transaction underscores the trend of consumer packaged good (CPG) companies entering the personal health space, a strategy that Reckitt Benckiser began in 2006 with the acquisition of Boots Healthcare International.

Finally, but of no less significance, we have the BASF acquisition of Pronova. This is yet one more example of continued consolidation of the omega-3 sector. We now have two significant and dominant players in the omega-3 space: BASF and DSM. As a very profitable company, Pronovas acquisition multiples were most notable on the revenue side at 2.8-times revenue and six-times EBITDA.

These and many other transactions in the VMS category continue the trend of larger, slow growing companies looking to fast growing VMS companies, across the value chain, for growth. Historically, we saw this trend emerging in the late 1990s only to be crushed in part by a consumer market that was not as mature as many of the buyers had thought. Fast forward to the last several years where a larger consumer base is embracing a healthier lifestyle and is more informed about their health and steps they can take to improve it. Most importantly, consumers are broadly accepting of science based, clinically researched and cGMP (current good manufacturing practice)-produced products. I believe this will lead to above average growth in the sector and continued interest by strategic buyers and investors globally. Will your company be positioned to take advantage of these liquidity trends?

Liquidity Options for Todays VMS Companies

The primary tenet of capitalism is creating and maximizing shareholder value. Over the years, this has been somewhat modified to include all stakeholders including employees, customers, suppliers, the environment and societya pretty tall order.

  1. Generational transition;

  2. Desire for shareholder(s) to diversify locked-up wealth;

  3. Raise growth capital

  4. Establish a public market for the companys stock where a company is valued through the public markets and shareholders can use the public markets for liquidity over time.

The financial markets are ever changing as are the options for gaining liquidity. In the 1980s and most of the 1990s the public markets were the go-to liquidity option for small and mid-size companies. However, that source of liquidity has changed dramatically as onerous public market regulation, evaporation of the retail investor and the rise in the importance of the institutional investor has diminished the appeal and accessibility of the public market for a large number of companies. Although still a viable option for those with growth and financial metrics that match the size requirements of institutional investors, most companies in the VMS sector will find more interest from strategic buyers, strategic investors and private equity (PE) firms.

PE firms have become the de facto public market during the last decade. Not only can they provide a full liquidity event for shareholders, but they also serve to provide growth capital and partial liquidity to companies looking to grow to the next level, a level that will make them more attractive as an M&A or public market candidate. Given the growth in the number of PE firms during the last 10-plus years and the amount of capital under management, a willing investor can always be found.

On the other hand, in todays low growth environment strategic buyers and investors are looking to innovative, unique and high growth companies to: 1) enhance their growth, 2) enter a new line of business, 3) access new customers, or 4) acquire new technologies. Historically, strategic buyers have tended to value companies higher than private equity. Recent M&A transactions bear this out. In recent years, strategic buyers have been very creative in structuring transactions that have generated significant value for shareholders over time.

As a C-suite member, board member or operator/shareholder who both works on" the business strategically and in" the business tactically, you have direct impact on the metrics that can make your business more or less attractive, and more or less appropriate for these various liquidity venues. Understanding key value drivers can mean the difference between generating exceptional value upon exit as in the Schiff transaction or below average value more often associated with a distressed company. Being responsible for generating shareholder value, you clearly want to be in the Schiff camp.

David T. Thibodeau is managing director Wellvest Capital in Boston with more than 25 years in the health and wellness sector. Reach him at [email protected].

Learn more in Thibodeau's SupplySide West presentation, "Industry Financial Trends and Current Stockholder Liquidity Options," on Thursday, Nov. 14 at 3 p.m.

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