April, 2007

Nutrition Business Journal

The nutrition industry has been very good to TSG Consumer Partners (formerly The Shansby Group), and the 20-year-old private equity fund has fueled growth in the industry with its strategic investments in natural product companies since the mid 1990s.

A list of TSG’s deals reads like a Who’s Who of brands: Alexia Foods, Arrowhead Mills, Garden of Eatin’, Harry’s Fresh Foods, Met-Rx, Smart Balance, Terra Chips, VitaminWater and others. “We’ve been a bit of a pioneer in terms of identifying these categories ahead of other investors,” said Jamie O’Hara, managing director. “We were the first to invest in the natural and organic food space with Arrowhead Mills, one of first to get into the functional food space with our investment in Met-Rx, and we’ve continued to go after investments in both those segments.”

The fund has bought and sold companies in other segments, from car wax to OTC pharmaceuticals, but it seems clear that the rapid growth of revenues and earnings from the natural brands in its portfolio – and the resulting value achieved through sales to purchasers like Hain-Celestial and Rexall Sundown – have been a major factor in TSG’s reported average annual return on investment of 59% since 1987.

Last year TSG sold its 30% stake in Energy Brands (Glaceau VitaminWater) for $677 million to beverage giant Tata Group of India, and it announced a still-pending sale of GFA Brands (Smart Balance, Earth Balance) to Boulder Specialty Brands Inc. for $465 million. Such a track record continues to draw more capital from investors. In December, TSG topped off its fifth private equity pool with $875 million, including commitments from the State of Michigan Retirement System and the New York State Teachers’ Retirement System.

But is the window narrowing for profitable investment deals in an industry that has undergone a decade of increasing maturity among categories, and consolidation up and down the value chain? O’Hara is optimistic. “The trends we’ve seen develop over time continue to develop,” he said. “For healthier natural foods as well as functional foods, there are higher levels of consumer awareness, as well as tremendous opportunities to drive awareness higher.”

“Demographics continue to be very favorable,” O’Hara continued, “As boomers are aging, they’re becoming much more focused on having a good quality of life going forward, and they recognize that a key way to get there is through food. Finally, the technology has gotten better and better in the sense of manufacturers’ ability to produce a product like VitaminWater in which you have your daily value of vitamins and minerals in a product that is as enjoyable as lemonade.”

But that doesn’t mean potential acquisitions and partners are plentiful. “As we look in the natural and organic space, there are not a lot of what I call mid-sized or significant-sized companies,” said O’Hara. “They’re either very small or they’ve already been picked up by larger companies.” TSG seeks companies that have at least $30 million in annual sales, but will consider companies at or below that low end if we think they have the ability, with the right roll-out and marketing support, to really grow quickly.

“Our top criteria are differentiated positioning and strong gross margins,” said O’Hara. “If a company has strong gross margins and a differentiated position, we can invest in increasing consumer awareness through advertising and promotion and by launching new products to drive growth.” The competitive dynamics in categories are also important. “There are certain categories in which it can be more challenging to invest in growth, depending on who controls the category and its maturity… Shelf-stable juice or salty snacks in the mass channel, for example.”

O’Hara also emphasized that a key part of TSG’s strategy to create value in its portfolio companies is to minimize debt. “The more debt you have the less ability you have to invest in things like new products and new channels because you can’t support it with advertising and promotion,” said O’Hara. He thinks that companies that borrow heavily risk eroding long-term value. We like to partner with extraordinary entrepreneurs and extraordinary management teams [that] haven’t had a lot of debt historically… We really want to drive revenue growth and build the brand equity associated with our companies. Ultimately that’s what creates exit value and interest from strategic buyers.”