Food & Beverage

Snack Time

Sweeping shifts in U.S. lifestyles propel a wave of food and beverage deals

As consumers increasingly buy into the idea that their eating habits affect their health, dealmaking in the better-for-you food business is flourishing. Private equity firms and strategic buyers are investing heavily in the sector, which has also seen successful initial public offerings lately. (Watch video below)

Organic food sales in the U.S. have increased to about $27 billion in 2012 from about $11 billion in 2004, according to the U.S. Department of Agriculture. Organic food sales accounted for more than 3.5 percent of total U.S. food sales in 2012.

"Over the past 15-plus years, consumers have been looking for healthier options in all the categories they shop - snacks, beverages, even pet food," explains Michael Mauzé, co-founder of VMG Partners. In July, VMG sold Sea Cliff, N.Y.-based portfolio company Robert's American Gourmet Food LLC to B&G Foods Inc. (NYSE: BGS) for $195 million.

The portfolio company does business as Pirate Brands and makes Pirate's Booty, Smart Puffs and Original Tings brand snacks.

"Consumers are looking for healthy snack alternatives, and Pirate's Booty offered that," says Mauzé. After investing in Pirate Brands in 2008 alongside Mike Repole, co-founder of Vitaminwater and chairman of Pirate Brands, VMG grew Pirate Brands' distribution to more than 70 percent of the total possible outlets it could be sold in, up from 50 percent, according to Mauzé.

"Strategic buyers are looking for authentic brands in those spaces, and those authentic brands are getting built by the entrepreneurs out there. It's hard to take an unhealthy brand and even reformulate it to make it healthy," says Mauzé. "It's much easier for a large consumer products company to buy a healthy brand with healthy attributes than to create one."

Annie's Inc. (NYSE: BNNY) offers a good case in point. The Berkeley, Calif., maker of organic macaroni and cheese kits, Bunny Grahams and other organic snacks is an early success story in the healthy food sector. Founded in 1989 by Annie Withey and Andrew Martin, and backed by New York private equity firm Solera Capital LLC, Annie's boasts one of the most successful initial public offerings in recent years. Shares of Annie's soared 89 percent and closed at more than $35 on its first day of public trading on March 28, 2012.

"There is now a pretty mainstream awareness that what we eat is really important to our overall health, and that is magnified when our kids are involved," says Molly Ashby (pictured), co-founder of Solera Capital and the chairman of the board of Annie's. "Millennial consumers look for brands that resonate with their own values. They appreciate authenticity like no generation before them," Ashby says.

Authentic- and natural-food businesses are the ones attracting buyers, says James Bertram, a managing director at Chicago investment bank William Blair, who worked on the Annie's IPO. "Although they are small in terms of sales, the brands mean a lot to the core consumer," says Bertram.

Retailers are benefiting from the same trends. Sprouts Farmers Market (Nasdaq: SFM), is one example: a 163-store supermarket chain that sells natural and organic food, and that is backed by Apollo Global Management LLC (NYSE: APO) and Silver Canyon Group. Sprouts went public on Aug. 1 with its shares surging 123 percent to $40.11 on its first day of trading, the best IPO the market has seen in two years.

"Retailers - grocery, mass, club - are rapidly expanding their product offerings in the sector, which is also fueling industry growth," Ashby says.

"The industry just follows where consumption goes, and consumers are looking for some options that are better for you," says Pierre LeComte (pictured), a managing director at TSG Consumer Partners LLC. TSG's former portfolio companies include Pop Chips, a brand of better-for-you chips, and Harry's Fresh Foods, which makes organic and healthy meals.

Currently, the San Francisco-based private equity firm is invested in MyFitFoods, which provides gluten-free healthy meals.

When those "authentic" brands are purchased, buyers can expand the distribution channels and sometimes the brand itself.

TSG led Pop Chips, a former portfolio company, into the tortilla chip category before it sold the brand to San Francisco investment firm Verlinvest in 2012, according to LeComte. Pop Chips are baked and contain less fat than traditional potato chips.

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