Deals Getting Done; Investors Cautious
Published: Thursday, November 01, 2001
Nonetheless, some industry observers see signs of a fresh breeze of investors ahead. However, not all companies may benefit, because investors’ criteria for selecting companies has become more stringent. In particular, small companies and those without strong competitive advantages may not be able to raise capital on any terms.
Investors are becoming increasingly more interested in functional foods after three years of disenchantment with broad-line nutritional supplements companies and early-stage-product development companies. David Thibodeaux, an investment banker at Adams, Harkness & Hill, says: “We are seeing a significant amount of interest in the natural products space, including private-equity groups that are new to the industry. These investor groups want to be in the forefront of where functional foods are going.”
Greg Badishkanian, a securities analyst at Salomon Smith Barney, also believes that the private-
equity window is open to natural products companies on a restricted basis. He cites the successful IPOs, post Sept. 11, of two companies, Constellation Brands and Performance Food Group. He believes that “as a result of these successful transactions, it is likely that activity in private-equity deals will pick up in the near term.”
An investor-entrepreneur, who has actively analyzed and invested in several natural products companies when other investors were sitting on the sidelines, sounds one cautionary note. He comments that “because venture capital has withdrawn from the industry, money will be even harder to find in the near term. Small companies will be hard-pressed to obtain capital, which will result in lower valuations and more restrictive terms for those companies that are successful in their quest for capital.”
A look at four companies that recently concluded private-equity transactions is instructive about what currently excites investors.
Stonyfield Farm is the leading natural yogurt producer in the market and is also the fourth-largest brand nationally for all cup-yogurt products. The company has grown rapidly, is profitable, has strong management and concluded an investment with sophisticated private investors a few years ago. Groupe Danone’s minority investment (see related story, pg. 5), which may be a prelude to an acquisition, has obvious mutual benefits for each side.
Pharmaca, a Boulder, Colo.-based integrated pharmacy, obtained more than $1.5 million from sophisticated, high-net-worth individuals. The company has a successful store model execution to its credit and an experienced management team that has made money for investors in the past.
All Goode, a small company based in Santa Barbara, Calif., raised a significant amount of money from Bay City Capital, a venture capital group in San Francisco, to launch a line of nutrition-bar products. The company also owns a niche line of medicinal teas that has been repackaged and marketed to a broader market segment. The venture investor in All Goode was historically primarily an investor in biotech and other high-technology situations.
Wildwood Natural Foods, a northern California-based manufacturer and marketer of tofu products, recently raised just over $3 million. The proceeds will be used to increase production capacity and expand Wildwood’s marketing efforts. The company is considered to be the quality leader in the California market. An Iowa-based investor group made its decision to invest on the basis of Wildwood’s market potential as well as the siting of a new production facility in that state.
What is clear from the activities of the investors in the four cases just cited is that profitability and a profitable business model are the most important criteria for investors.
Chuck Slotkin is president of Nature’s Equity Inc., a New York-based investment banking and business development firm. For information, contact 212.580.1666, neichuck@aol.com.