The consumer goods space has been abuzz with acquisition activity during the past few years. “We don’t see it slowing down in the near-term, though there are signs things will change by 2019,” says Joel Montminy, CEO of Los Angeles-based boutique investment bank CREO Montminy & Co, whose team has done nearly 100 transactions in the consumer space to date. “There’s been a record number of private equity-backed deals and mega-deals recently announced. ”
In addition to the private equity players, there is interest from consumer conglomerates as well. In particular, “strong interest in healthier and organic products is really driving some of the major consumer conglomerates to reshape their portfolio,” says Montminy. “Corporations are spinning off assets that are less healthy and acquiring assets with a healthier bent — and paying a higher multiple for them.”
This trend has been present for the past three to four years with little sign of abating. “This trend will continue. Consumers are more and more focused on what they’re putting in their bodies, what they’re putting in front of their children, and how it’s sourced,” says Montminy.
For example, in May 2018 PepsiCo (NYSE: PEPE) acquired Bare Foods Co. from private equity firm NGEN Partners, maker of fruit and veggie snacks — think sea salt carrot chips and cocoa banana chips. PepsiCo’s Frito-Lay North America unit president Vivek Sankaren told the New York Times, “We have been on a journey of broadening the snack portfolio for many years now,” with acquisitions of other brands like Off the Eaten Path, whose products include “Veggie Crisps” made of rice, peas, and black beans. The percentage of revenues from healthier foods and beverages at PepsiCo grew from 38 to 50 percent since 2006, reports the Times.
“Healthy living continues to be a focus — consumers are more and more focused not only on quality ingredients and clean processes for food, but also on personal care products being used by their families, the impact on the environment and its mission. They want to know where it’s sourced from and how it’s sourced and they pay a lot of attention to the messaging around each brand,” says Montminy.
The key is to marry these characteristics with a reasonable price point. “At that point you have something like The Honest Company,” says Montminy, which recently announced a $200 million strategic minority investment from private equity firm L Catterton. “That’s an example of a brand that has a message and stands for something people want to get behind, and is also at a price point that is within the reach of a sizable consumer segment. I think you’re going to see more and more companies popping up around these themes.”
Risks for Large Conglomerates
“Just because a business has an organic or natural bent, doesn’t mean it will be successful under a conglomerate,” says Montminy. Campbell’s is one cautionary example — the brand’s Campbell’s Fresh arm has struggled following acquisitions of companies like organic salad company Bolthouse Farms in 2012 and salsa maker Garden Fresh Gourmet in 2015.
Distribution in particular presents a challenge in this segment. “The one-size-fits-all model that works in packaged food is harder to apply to new, artisanal products, especially in the fresh aisles of the store,” JPMorgan analyst Ken Goldman noted in a research note last year. Bolthouse Farms has also struggled with weather-related concerns; Campbell CEO Denise Morrison said last year that the business was “much more volatile than expected” and would require an increased focus on agricultural operations.
There’s also another potential challenge for conglomerates acquiring niche organic/healthy/natural brands, in that the very factors that often draw consumers to those brands — their independence, small size, unique messaging — more or less evaporate once they are acquired. “These brands are highly focused and concentrate on providing value. But they can get completely lost in the portfolio of large companies,” says Montminy.
For example, Montminy represented DeLeón Tequila in its 2014 sale to celebrity Sean Combs and beverage giant Diageo. “DeLeon was one of the highest priced premium tequila products in the world — super high end packaging, very exclusive distribution. People were willing to pay a lot per glass and per bottle to drink DeLeon — it was a status symbol like driving a Bentley,” says Montminy. “Diageo and Sean bought it because they believed they could bring the price point significantly down and have Sean back the marketing and accelerate the growth. But everything changed — they used a different formula, the packaging changed from heavy glass bottles to plastic, and the consumer that was seeking the exclusivity of its consumption drifted away from it.”
This is a similar quandary faced by big companies acquiring healthy brands.“Big companies are built around accelerating distribution and driving down costs with mass production. But if you are not able to keep that secret sauce and translate it on a broader scale, you ultimately have value deterioration with the acquisition,” says Montminy.
Applications to the Lower Middle Market
In the lower middle market, “we’re seeing a preponderance of companies that have interesting products and ‘kitchen cook’ type owners with really interesting formulations and a desire for the cleanest, highest quality product,” says Ben Olsen, managing partner at boutique M&A firm The DVS Group, based in Leawood, Kansas. DVS Group is currently working on the buyside with two family offices interested in the personal care products space, with a particular emphasis on natural ingredients and good for you/good for the earth outcomes.
“What we’re seeking is a relatively rare breaking point where companies can move from a household business to being a million-dollar-plus revenue company with a significant amount of channel penetration — whether that’s Amazon, Whole Foods, grocery or and specialty retail,” says Olsen.
Just as with larger deals, brand integrity is paramount. “I would argue it’s necessary to maintain the presence of the founder in any brand post acquisition with a pretty significant amount of seller financing and rollover equity. That’s a major feature we’re looking for. From a financial standpoint it improves our leverage, but it also helps us maintain alignment with the best possible brand ambassadors.”
The DVS Group is primarily looking at deals that are sub $5 million in revenue. When it comes to evaluating these “micro-brands,” Olsen says there are reasons to be cautious. While “good for you and good for the earth” brands are hot, “of course there’s a lot of fringe science being done out there to substantiate the benefits. It can be hard to evaluate efficacy since these companies don’t have the resources to do their own clinical studies. Still, we’re seeing an enormous range of products that are being effectively re-engineered by these grassroots, kitchen cook entrepreneurs so that they can have the best combination of naturalness, efficacy, and shelf stability.”
It’s unlikely that a huge brand like PepsiCo or Campbell’s would reach down for deals of this size. But even for small companies looking to sell, it’s paramount to ensure that a would-be acquirer is a good cultural fit for the brand. Olsen says that while they’re not the only option, family offices are often a good fit for these businesses. “Family offices often have the flexibility to go after smaller acquisitions and they’re generally able to tell a story about partnership and family in a way that’s different from standard private equity money managers. They need to be interested in maintaining and acknowledging what keeps the product special.”
As in any segment and for any size company, price and quality are paramount. “The product really does have to be better than something else out there at an achievable price point to ensure success,” says Olsen.