Nestlé (NESN.S) is increasing its mix of mergers and acquisitions. The Swiss food giant buys brands like Solgar and Puritan’s Pride from supplement maker The Bountiful. The desire to boost immunity during Covid-19 has boosted sales. CEO Mark Schneider needs consumers to continue to swallow the hype that these pills actually work.
KKR (KKR.N) bought Bountiful from another private equity group Carlyle in 2017, just in time for last year’s surge in spending on vitamins and other immune system tonics. Euromonitor estimates global sales increased 7% to $ 116 billion. Bountiful surpassed that with 10% year-over-year revenue growth through September. This explains why Schneider pays almost 17 times its EBITDA for the 12 months to March. In contrast, Carlyle (CG.O) took the private group on a multiple of 8 times in 2010.
Schneider will have to work hard to ensure a healthy comeback. Nestlé did not disclose the operating profit of the brands purchased. However, it’s safe to assume that these brands represent the lion’s share of Bountiful’s profits, given that they make up the bulk of the US group’s revenue. Suppose, generously, that Nestlé swallows all of Bountiful’s operating profit and grows 10% this year, in line with the revenue growth of last year. This equates to $ 217 million in operating profit. Ignoring synergies and after Nestlé’s 21% average tax rate, this yields a 3% ROI, below the cost of capital of 4.6% for health product groups, as estimated by NYU Stern analysts.
On the plus side, the so-called “wellness trend” means consumers are happy to pay through the nose for health and beauty products. It paints Bountiful in a more attractive light – at least superficially. Scientific evidence is mixed. A 2020 study from the British Medical Journal, for example, found that consuming dietary supplements was largely unnecessary.
In addition to having to convince people that they actually work, Nestlé has its work cut out for them to convince them that its expensive pills are superior to cheaper pills. Bountiful’s sales, general and administrative expenses accounted for nearly 30% of revenue for the year through September, according to its initial public offering in the United States. The document also cited consumer perceptions as the main risk factor. Schneider will have to spend the money to keep the bettors hooked.
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NEWS FROM THE CONTEXT
– On April 30, Swiss food giant Nestlé said it had agreed to buy certain health-related brands from supplement maker The Bountiful for $ 5.75 billion.
– The acquisition includes Nature’s Bounty, Solgar, Osteo Bi-Flex and Puritan’s Pride, as well as the company’s US private label activities. The brands will be integrated into Nestlé’s Health Science unit, which includes peanut allergy treatment specialist Aimmune Therapeutics.
– The sports and active nutrition brands of Bountiful Pure Protein, Body Fortress and MET-Rx, as well as Dr. Organic and its Canadian over-the-counter business, are not included in the deal, Nestlé said.
– Bountiful is majority owned by private equity firm KKR, which acquired a majority stake in the Carlyle buyout group in 2017.
– Nestlé stock rose 0.7% to 109.88 Swiss francs at 0801 GMT on April 30.
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