When looking over the transaction activity in the broader nutrition and health & wellness industry over the first half of 2012, interesting observations arise.
 
Before we go any further though, it is worth explaining what I am calling the nutrition and health & wellness (NH&W) industry, as unfortunately, there is no uniformly accepted name or definitional parameters for the industry we are in. I choose to call it the nutrition and health & wellness industry today, principally because I selected the simplest and shortest term possible in “nutrition industry” when starting analyzing the industry in earnest in 1995. I added “health & wellness” in the last few years largely to satisfy the investment community, which is a major constituent of our Nutrition Capital Network (NCN) business and generally required an explanation of what the nutrition industry was.
 
In addition, when it comes to transactions, it is worth distinguishing between merger & acquisition (M&A) transactions and financing transactions. I understand of course there are also transactions between companies in the form of alliances, partnerships, joint ventures, etc., but these are even harder to track than the other two, so are left out of this summary.
 
So back to the industry … If we are quantifying the market we use the following segments in the nutrition and health & wellness industry: Natural & Organic Foods; Functional Foods; Lesser Evil Foods; Supplements; Natural & Organic Personal Care & Household Products; Specialty Ingredients; and Enabling Technology. For those who like numbers, we total these segments up to $215 billion in the U.S. in 2011.
 
If we are tracking transactions, then we use these segments with similar product categories that are more reflective of the supply chain: Natural & Organic and Functional Foods; Supplements; Ingredients; Contract Manufacturers; and Over-the-Counter & Personal Care Products.
 
The first observation is that the number of M&A transactions was down by almost 40% from the monthly pace of 2011. We counted 50 M&As across all the six NH&W industry segments to the midpoint of 2012, down from a total of 166 using the same categories in 2011.
 
While there were fewer deals, the M&A transactions that were closed increased notably in size. Signature transactions lifting the average deal size included Pfizer’s $360-million acquisition of Alacer (the Emergen-C brand) in supplements and DSM’s $540-million purchase of Ocean Nutrition in the ingredient segment. Even in retail, where Whole Foods has not been very active in M&A recently, the merger of the Sprouts (owned by private equity firm Apollo) and Sunflower natural food retail chains created a $2-billion company with 140 markets in the west. And as July broke with the announcement of the Campbell’s Soup $1.6-billion acquisition of Bolthouse Farms in natural & organic foods, surely we expect the average deal size in 2012 to increase in that segment too.
 
But back to the decrease in the number of deals. Our interactions with investors and acquirers, as well as analysis of the companies competing in the market, indicate that the pool of acquisition-caliber companies has thinned out. Yes, the market is growing, and yes, the opportunity for entrepreneurs and growth companies is still vibrant, but the pipeline of companies with $20-$50 million to $100 million in sales—when acquirers really get interested—is not filling as fast as companies have been acquired.
 
And for the main buyers—either corporate strategic buyers or private equity financial buyers—the bar is raising in terms of the size of companies they will even consider investing in or buying, particularly the latter. Equity firms that used to say they’d only start considering a deal at $2-3 million in EBITDA (earnings before interest depreciation amortization), now often start at $5-10 million in EBITDA. And even for a company making 10-15% margin, this means you have to be in the $50 million in revenue range already—certainly not the venture investing in garage or kitchen entrepreneurs of American capitalism yore. To be fair, there are some family funds, small venture groups and angel investors for early-stage deals, but these are mostly less capitalized and more risk-averse than they were before the financial crisis.
 
So all in all, the pool of M&A targets is a bit smaller, but we expect and hope that help is on the way—and the data bear this out. According to NCN’s Transaction Database, investment and financing transactions in the nutrition and health & wellness industry numbered 39 in the first six months of 2012, up from 27 in the first six months of 2011 and up 35% from the monthly rate of financings in 2011. And while these transactions are weighted more toward health & wellness technology, media and, dare we say, e-commerce deals than in the last 2-3 years, there were still a fair share of emerging brands on the list, as well as some new investors.
 
From where we sit at NCN, we have never seen a shortage of entrepreneurs, startups and growth-stage companies looking for capital and partnership. But there has been a shortage of investors willing to take the time and effort to engage with companies at earlier stages of development, ironically of course, when the companies most need it. Perhaps this is a microcosm of the economy, with excess capital locked up in places where it’s not leading to investment and employment needed for economic growth. But if the first half of 2012 is any indicator, at least we are moving in the right direction.