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.

"Consumers really wanted to have an alternative to the Doritos of the world," says LeComte.

What acquirers are really drawn to, Ashby says, is growth.

Strategic buyers are attracted to companies that are growing, in some cases, four to five times their own core growth, and provide a strong connection to the next-generation consumer, according to Ashby.

"Food probably lends the most opportunity for synergies from a strategic buyer's standpoint," says John Loeb, principal at food-focused investment bank J.H. Chapman Group LLC, headquartered in Rosemont, Ill. When a strategic buyer acquires a snack company, the buyer's infrastructure can help expand the new brand's distribution.

"It's very compelling for large strategic buyers to say, 'I can take these brands that have a lot of brand equity and are considered true authentic natural businesses, put them into my infrastructure, and make them much more scalable and efficient,'" says Bertram.

Private equity firms are sometimes willing to partner with a company earlier than a strategic buyer would, because a strategic buyer is often looking for a target with a more established infrastructure and track record, says LeComte.

Private equity firms like the growth dynamics and the recession-resistant nature of the industry, according to Ashby.

"Most of the private equity groups are also coming from a strategic point of view, because they already own a platform in the food industry," Loeb says.

The healthier category has become more and more accessible to consumers in recent years, as prices have gone down and the number of distribution channels has increased. Now, many brands are even accessible in the convenience channel, while they used to be found only in health food stores. "The gap is narrowing between better-for-you options and everyday mainstream options," says LeComte.

Better-For-You Buys

Following consumer demand, acquirers have purchased many healthy snack companies in recent months. "You see new products and brands that represent the range from healthier alternatives to 'old favorites' to ones that have a specific health benefit," says Ashby.

In May, B&G picked up another snack company - TrueNorth brand nuts. In October, the company paid $62.5 million to buy the New York Style and Old London brands from Chipita America Inc., a snack maker headquartered in Westchester, Ill. New York Style makes Bagel Crisps, and Old London, also based in Westchester, Ill., makes Melba toast and other Melba products.

Camden, N.J.-based Campbell Soup Co. (NYSE: CPB) is also easing into the natural food space with Plum Organics, which it bought in June. Plum makes organic snacks for children, as well as baby food. Campbell expects the deal to expand its access to the snack category, the company said in a statement.

"Plum Organics has deep connections and strong appeal with young parents," said Mark Alexander, president of Campbell's for North America, in a statement.

Campbell's Plum acquisition exemplifies the idea that many parents want to feed their children plain-label foods - those labels that are not cluttered with ingredients.

In June, the Campbell's also announced a deal to buy Danish snack food company Kelson Group. In another healthy food deal, Greenwich, Conn.-based private equity firm Brynwood Partners said in August 2012 that it would buy a controlling stake in the Back to Nature natural foods brand through a joint venture with Kraft Foods Inc. (Nasdaq: KFT).

Private equity firm Investcorp acquired Tyrrells Potato Crisps for about $152 million in August. The target, headquartered in Herefordshire, England, makes hand-cooked potato chips and vegetable chips (or crisps, as they're known in England), as well as other snacks, including popcorn. Bahrain-based Investcorp owns SourceMedia, the publisher of Mergers & Acquisitions.

Also in August, St. Louis, Mo.-based cereal maker Post Holdings Inc. (NYSE: POST) announced a deal to buy Premier Nutrition Corp. for $180 million. Emeryville, Calif.-based Premier Nutrition sells protein beverages and foods under the Premier Protein brand, and nutritional supplements under the Joint Juice Brand. The deal gives Post, which makes Raisin Brand, Pebbles and Honeycombs cereals, a platform in the nutrition and supplements business.

Behind the group of health-conscious purchases is really the health conscience of the consumer.

"It's really about people wanting to live better, healthier lives," says Bertram.

"There are a lot of demographic tailwinds to the natural organic category - there are the aging baby boomers who want to take care of themselves," Bertram says.

Free-From Foods

Beyond just better-for-you snacks, the sector has also seen deals in the "free-from" category - meaning snacks that are free from gluten and other allergens.

Niigata, Japan-based Kameda Seika Co. Ltd. bought a majority stake in Mary's Gone Crackers, a Gridley, Calif.-based snack maker in March. Mary's Gone Crackers makes organic, vegan and gluten-free crackers, pretzels and cookies that are sold in Whole Foods, Kroger, Sprout and other grocery and natural food stores. The deal is expected to expand Mary's Gone Crackers' distribution, according to a company statement.

Cloetta AB bought Goody Good Stuff, headquartered in Lancashire, England, which makes candy from fruit juices, in May. Goody Good's products do not contain fat, dairy, gelatin or artificial colors. Stockholm-based Cloetta owns several candy brands and manufactures chocolate products, pastilles and chewing gum. The buyer said it acquired Goody Good to expand its product range into the natural candy segment, in a statement.

In December, High Road Capital Partners purchased Ry-Con Specialty Foods Inc., a Camp Hill, Pa.-based company that makes hormone and antibiotic-free cheeses under the Andrew & Everett brand. High Road, a New York private equity firm, made the purchase through Panos, a company it bought in 2010 that makes and markets natural and specialty foods and beverages.

"A recommended change in eating habits is taking hold. It may be healthier to eat in smaller portions more times in a day. That means some of those eating periods are going to be snacks," Akason says.

"If you eat five or six times a day rather than three, snacks are going to grow," Akason says.

All Snack Types See M&A

Even traditional snacks are benefitting from changes in consumer eating habits, as shoppers move from a three-meals-a-day, meat-and-potato diets, to lighter, more frequent meals.

Funds advised by New York-based KKR Asset Management LLC agreed to buy a minority stake in PT Tiga Pilar Sejahtera Food Tbk for an undisclosed amount in July. The Java, Indonesia-based company manufactures food, processes rice and distributes palm oil.

The bankruptcy case of Irving, Texas-based Hostess Brands Inc. created several snack deals. The baked goods manufacturer was forced to liquidate and sell off its brands after a union strike in November 2012. In March, New York bankruptcy judge Robert Drain approved a deal that gave ownership of Twinkies and other cake brands to New York private equity firms Apollo Global Management LLC and C. Metroupolos & Co. for $410 million. Drain also approved deals for Collegedale, Tenn.-based McKee Foods Corp.'s takeover of Hostess' Drakes assets, which include Yodels and Devil Dogs, for $27.5 million.

In January, Nonni's, a cookie maker backed by private equity firm Wind Point Partners of Chicago, bought La Dolce Vita, a maker of Italian biscotti and specialty cookies. The deal came about a year after Nonni's picked up Thinaddictives, which also makes biscotti cookies.

In January, Austin, Minn.-based Hormel Foods Corp. (NYSE: HRL) closed a deal for Skippy peanut butter from Unilever United States Inc. for $700 million. Skippy makes 11 peanut butter products, including super chunk and honey-nut creamy peanut butter, and is sold in more than 30 countries.

Also in January, Hammond's Candies bought Old Dominion Peanut Co. Inc. from the Virginia Food Group. Norfolk, Va.-based Old Dominion manufactures peanut brittle and peanut candy in the U.S. Hammond's, of Denver, Colo., makes candy, including lollipops, candy canes and ribbon candy.

In December 2012, Arca Continental SAB de CV, headquartered in Mexico City, bought Berwick, Pa.-based Wise Foods Inc., which makes snacks under the Wise, Cheez Doodles and Moore's brands.

Buyers Gulp Beverage Deals

Broadening trends in American lifestyle and eating habits have also been a source of beverage M&A.

In 2012, Starbucks Corp. (Nasdaq: SBUX), headquartered in Seattle, paid $600 million for Atlanta-based tea retailer Teavana as a way to continue its growth in the tea category and complement the chain's Tazo brand tea.

Other beverage deals include Surrey, England-based Oakfield Capital's July agreement to invest about $1.5 million in Freedom Brewery, which develops craft beers and is headquartered in Staffordshire, England. Also Detroit private equity firm Huron Capital Partners LLC bought coffee distributor International Blends LLC in April to add to portfolio company Ronnoco Coffee LLC. The transaction allows Ronnoco to grow its core market and expand across Missouri.

The company owned by "Grey's Anatomy" actor Patrick, Global Baristas LLC, also got involved in the beverage M&A space as the winning bidder for Seattle-based TC Global Inc., which does business as Tully's Coffee. Global Baristas bought the company in a bankruptcy auction that concluded in January.

Private Label Brands Continue Growth

The private-label sector, which produces store-brand snacks and foods, is expected to experience more growth and M&A in the near future. The growth in that sector really began as consumers shifted toward private label foods during the recession, and the products have evolved and improved, according to Bertram.

Underscoring that trend is ConAgra Foods Inc.'s (NYSE: CAG) deal for Ralcorp Holdings Inc., a company that provides private-brand foods sold under store labels, including crackers, cookies, candies and frozen meals.

"ConAgra buying Ralcorp really sends a signal that store brands and private label brands are here to stay," says Brad Akason, a managing director at Chicago investment bank Lincoln International LLC.

In another private label deal, private equity firm Wind Point Partners paid $500 million in August 2012 for Ohio-based Shearer's Foods Inc., which is a private-label maker of salty snacks, kettle chips, pretzels, popcorn and salsa.

Over the next 12 months, experts expect both strategic and private equity buyers to continue salivating over better-for-you snack deals. Healthy food M&A in general, as well as M&A in the beverage and private label sectors, is also expected to continue.

"It wouldn't surprise me if there were some more tea M&A this year," says Akason.

Deals for Greek yogurt and snack bars are also expected, says TSG's LeComte, as well as continued M&A in the "free-from" group, according to Akason.

"Whether in the snack bar space, the yogurt space - even the candy space - we're seeing people look for healthier options," says Mauzé.

Ease of Online Ordering Spurs M&A

Another trend fueling food M&A is the move to online ordering.

Recently, transactions between online food delivery and reservation services have picked up - in part, because of ease.

"It's convenient. You have a tech-savvy generation that's now ordering dinner on the computer more and more, so yes, there will be consolidation," says James Bertram a managing director at Chicago investment bank William Blair.

Two food delivery services, Seamless and GrubHub, merged this year. Both companies allow users to order food online or through mobile phone applications. The combined company expects about $100 million in revenue, according to a company statement.

Also in 2013, online restaurant reservation company OpenTable Inc. (Nasdaq: OPEN) expanded its services with a deal for Foodspotting, a mobile application that allows users to find and share photos of dishes at restaurants, for $10 million. The company expected the deal to make it easier for customers to decide where to dine, it said in a statement.

San Francisco-based online review website Yelp Inc. (NYSE: YELP) acquired SeatMe in 2013 to expand its online reservation service.

In June, EMN8 Inc. bought Snapfinger, a service that allows users to place orders from restaurants from the company's website or mobile application.

Earlier in June, private equity firm HGGC (formerly known as Huntsman Gay Global Capital) invested in MyWebGrocer Inc. The Winooski, Vt.-based company provides the option for grocery stores to offer online ordering and delivery to their customers.

In June, online ordering service Delivery.com said it would buy Brinkmat LLC, to expand its delivery services into the laundry arena from food and beverages.

In 2011, before the Seamless/GrubHub merger, Seamless picked up MenuPages, a company that allows users to look at restaurant menus on the Internet.

Between online menus and nutritional profiles, "you can pick and choose and maintain a diet and still be able to dine out, all enabled through technology," says Pierre LeComte, managing director at TSG Capital Partners.

In 2010, OpenTable scooped up Toptable.com for $55 million to expand its online restaurant reservation services.

Subscribe Now

Complete access to real-time information and analysis of news and trends in the industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.

Corrected September 25, 2013 at 1:07PM: 2694930053001