Buyers Look To Healthy Living For Returns –

Based on the scale of Americas’ weight problem, one might think investing in healthy living would be a contrarian bet. But with government inquiries into how to solve the growing obesity problem, coupled with the media’s attention on low-carb diets, this onetime niche market is evolving into an industry of its own.

And, as for those who call two Krispy Kreme doughnuts breakfast, private equity views that part of the population as the opportunity behind the investment. Peter Brockway, a managing partner at Gold’s Gym investor Brockway Moran & Partners, says, “In a lot of ways the healthy living space is underpenetrated. Fourteen percent of the population belongs to a gym, which probably leaves around 86% of the population that should be working out.”

Stephen Koffler, a managing director at Barrington Associates that had worked on the Jenny Craig deal, says, “Among the private equity firms, there’s a great deal of interest in the sector. The demographics are such that the space is growing rapidly, especially given the attention it is receiving from the government and the medical profession.”

Since the start of 2002, buyout firms have acquired such names as Clif Bar, Herbalife International, General Nutrition Cos., Energy Brands, Jenny Craig, and others, and firms continue to be actively searching the sector for new investments. Just recently, Parthenon Capital and GS Capital Partners made headlines with their purchase of Atkins Nutritionals.

Chip Baird, founder and managing director at North Castle Partners, a firm that focuses exclusively on the healthy living industry, says, “[Obesity] impacts all demographic groups, all education levels, and all ages. It’s no longer considered a personal choice, and that’s all come together to make obesity a blockbuster societal issue… Private equity firms do a good job ferreting out interesting spaces to pursue, and this is a $500 billion space that we would suggest is growing in the double digits.”

The statistics certainly paint a grim picture. According to the Centers for Disease Control and Prevention, over 64% of adults in the U.S. – aged 20 years and older – are overweight, while 30.5% would qualify as obese. In 1980, by contrast, 46% of adults were considered overweight and 14.4% were obese. These numbers have belts transforming from merely an accessory to a necessity for most Americans. In 2003, the cost of obesity cracked $75 billion, according to the CDC, and taxpayers, through Medicare and Medicaid, financed roughly half of that.

As the problem continues to expand, businesses are putting together a renewed focus on healthy living. Fast food restaurants are tackling the problem by providing low fat substitutes on their menus and even introducing low-carb, Atkins-friendly offerings. The soda makers, meanwhile, are going from big gulp to one gulp by introducing smaller bottles, and bread makers are hard at work trying to make a low-carb alternative that is still palatable.

A Wide-Ranging Sector

When targeting the industry for investment, buyout shops have focused on a number of areas, including vitamin-enriched waters, healthy and low-carb foods, supplements, health-focused retailers, fitness and diet centers, personal care products, and even fitness video makers and day spas.

The impetus behind these investments, in addition to the glaring need for better nutrition nationally, is the aging baby-boomer generation, of which most private equity decision-makers are a part of. “There are a number of reasons for the trend, but the most obvious would have to be the aging baby boomers,” says Parthenon Co-Chief Executive Ernest Jacquet. “Increasingly we’re seeing this generation focus on their quality of life, with new drugs, medical procedures and healthy living, and people realize they can potentially extend the span of their active years. Also, given the disposable income of the generation, coupled with the early retirements-particularly post tech bubble-people have the time and initiative to seek a higher quality of life.”

When investing in the healthy food space, many agree that having a mid-market focus helps keep competition from the strategics at bay. Jacquet notes, “We’re finding in the middle market that there’s less competition from the corporate buyers. They would rather buy a company after it’s been given scale.”

And once the scale has been given, the corporate food companies provide a perfect exit opportunity for private equity firms. The strategic giants right now are scrambling to meet these health-conscious needs, and many will look to do so through acquisitions, most likely making private equity’s play in the sector a successful strategy. “[Healthy living] is a very large space,” Baird says. “It’s also a space that is very attractive to strategic buyers, and you will always have corporates that are interested.” (see box, page 74.)

“With healthy foods, the trick there is you need to understand the mainstreaming of that,” Brockway says. “A lot of healthy foods have gone mainstream, so you have to understand how that works. It’s less of cottage industry now and there’s more of the regular dynamics of selling foods to supermarkets, but that makes it more open to consolidation.”

Other Target Areas

Of course, the rush to lose weight is nothing new, and private equity has done its part to assist the battle of the bulge for some time now. In years past, the industry has been quite active in the fitness chain space. Gold’s Gym International, Town Sports International, Life Time Fitness, Spectrum Health Clubs and Equinox Fitness Clubs are all owned by private equity sponsors.

While the same fundamentals still apply, as far as the aging baby boomers and the ongoing individual effort to slim down, fitness club investments for private equity were not so much of a “hot sector” as a slow growth movement. “Gym investments have never really been that hot spot,’ per se.” Brockway says. “It’s been more of steady climb over time… But right now there are a lot of things pushing the sector: The average club experience is much better today over 10 years ago. You’re also seeing more facilities and better gyms, and depending on the area, it’s not too much of an expenditure.”

Trouble Spots?

The healthy living space has already proven to be quite resilient. Since the Parthenon and GS Capital Partner investment last year, Atkins Nutritionals has already had to sidestep a number of potential pitfalls such as the mad cow scare and allegations of Dr. Atkins being overweight upon his death. But to survive in this space, a company will need to be durable. “We are seeing increasing competition,” Jacquet notes, “But we believe it’s good for our company because it helps us validate ourselves [against the competition].”

Brockway adds, “There will probably be a shakeout at some time. With the consolidation, some brands will die and some will grow, and if you’re a little brand, you need to grow or get marginalized.”

However, Brockway stresses, “The thing about this industry, though, is you’ve got the wind at your back so it certainly helps mitigate the risk.”