Healthy returns

Montagu’s exit from organic food manufacturer Marlow Foods is the latest in a series of profitable health food investments for private equity firms. Colm Gilmore checks out the latest diet craze.

Fungi-based, substitute meat-based products doesn’t exactly have a sexy ring to it. 4.5 times money in two years does however. UK mid-market firm Montagu Private Equity’s sale of Marlow Foods, including the Quorn brand, just goes to show that healthy foods can make fat profits, as evidenced by recent private equity moves in this burgeoning sector.
 
The attractions are manifold. Product innovation and huge growth in the healthy foods sector have attracted consumers – steady cash flow – and private equity interest in equal measure.
 
A recent global food and beverages survey by market research firm AC Nielsen “What’s Hot Around The Globe 2004” showed that six of the seven categories that experienced double-digit growth in 2004 related to healthy eating and 12 of the other 17 growth categories related to health or diet.
 
In an increasingly health-conscious and diet-obsessed world, firms that produce organic foods, vegetarian alternatives and natural products are outstripping more traditional, well-established global food brands. Last year Quorn, the meat alternative products manufacturer, generated retail sales of £95 million (€142 million; $174 million), more than brands such as Heinz Tomato Ketchup and Kellogg’s Cornflakes.
 
Montagu acquired the Quorn brand through its acquisition of Marlow Foods in 2003 in a transaction valued at £60 million. The sale this week to trade buyer Premier Foods for £172 million notched up an impressive 4.5x return on Montagu’s original equity investment.
 
Not that Montagu is the only player looking seriously at health products. London-listed 3i has also made impressive inroads in the sector. In May, the firm sold Braes Group, a UK fruit and vegetable extract manufacturer to Natraceutical, a Spanish trade buyer for €80 million. Earlier this year, 3i also sold its 15 percent growth capital stake in cereal bar manufacturer Halo Foods to UK-listed food company Glisten for an undisclosed sum.
 
Baugur, the acquisitive Icelandic investment group, currently owns Julian Graves health food stores and on a larger scale, Lion Capital, the European private equity firm formerly known as Hicks Muse (Europe), acquired UK breakfast cereal bar manufacturer Weetabix for £642 million in November 2003.
 
However, private equity firms would do well to beware the “faddish” nature of certain aspects of the healthy foods business. Last year New York-based JLL Partners filed for bankruptcy for one of its portfolio companies New World Pasta, which was partly publicly attributed to the rise in popularity of the Atkins’ diet that preaches avoidance of carbohydrates including bread and pasta.

However, less than six months later, US mid-market investor Parthenon Capital’s investment in Atkins Nutritional is now in default because carbohydrates are back in fashion amid concerns that the Atkins diet was merely a fad.
 
As quickly as pounds can go on to a waistline, so too can pounds come off the value of an investment it seems.