New York, Nov. 15 - Private-equity firm VMG Equity Partners recently bought a 20% stake in a small, niche tea company called Mighty Leaf.
It is a tiny deal - Mighty Leaf sales are only in the range of $20 million. But the mid-market private-equity firm is betting great things come in small packages. It could get a hefty pay-back, especially if Mighty Leaf catches the eye of a large food and beverage company.
But VMG's optimism may not be misplaced. A dearth of internal innovation and a growing fad for all things natural have been driving large consumer-product companies to gobble up niche companies that make products that are environmentally friendly or carry some kind of health benefits.
That trend is expected to continue. Nick Pavlidis, director of consumer investment banking at Robert W. Baird, says strategic, or larger, companies with which he has been speaking continue to show interest in these small companies. "What people may have thought was a phase with health and wellness products has proven to be longer lasting," he says.
Turmoil in credit markets has damped large private-equity deals. But smaller, growth-focused private-equity firms that are less dependent on debt are still interested in such niche consumer companies, Pavlidis said.
One recent deal in this space was Clorox Co.'s (CLX) agreement to buy Burt's Bees, a personal-care company that uses honey and beeswax in its products. Clorox will pay about $925 million and Burt's Bees' majority stakeholder is private-equity firm AEA Investors. L'Oreal SA (LRLCY) bought Body Shop last year, and Colgate-Palmolive Co. (CL) acquired natural-toothpaste maker Tom's of Maine.
Several private-equity firms have been able to benefit from the health and wellness trend. For example, PepsiCo Inc. (PEP) bought Naked Juice Co. from North Castle Partners for an undisclosed amount this year.
"Consumers are moving toward healthy beverages in general," said Mike Mauze, managing director at VMG Partners. Mauze says he eventually believes that Mighty Leaf - which sells premium whole-leaf tea pouches and tea leaves, could be attractive to a variety of strategic buyers ranging from Unilever NV (UN) to Nestle SA (NSRGY).(Mighty Leaf doesn't sell ready-to-drink tea.) He puts the size of the loosely bagged tea category at above $2 billion.
And beverages aren't the only area of interest. VMG recently also bought a stake in natural-cosmetics company Colorescience. North Castle Partners in September announced that it acquired a controlling interest in Atkins Nutritional Holdings, a maker of healthy nutrition bars and shakes.
"The key is the large consumer-product companies have little to no growth in their core businesses, and they want to buy businesses that are growing," said Alexander Panos, managing director at private-equity firm TSG Consumer Partners. He says his firm isn't affected by the credit crunch because it doesn't depend on a lot of debt. Earlier this year, TSG sold its stake in natural-food company Alexia Foods to ConAgra Foods Inc. (CAG).
VMG's Mauze says his firm is looking to grow Colorescience to the point where it would attractive to strategic buyers like Procter & Gamble Co. (PG) and L'Oreal.
Some large consumer companies have in recent months said they aren't looking to make giant deals, but are constantly on the look out for "tuck-in" or smaller acquisitions. Larger companies are less willing to take on risk, and often prefer to buy successful businesses rather than experimenting with brand-new products. Many of these niche companies they acquire are nurtured for years by patient entrepreneurs. For instance, Mighty Leaf Chief Executive Gary Shinner first started his business as a tea house in 1996.