Chopping Block: Food Carve-Outs Creating Fresh Value

Key Takeaways

  • Within the food industry, corporate carve-out activity is intensifying as large food companies hunt for new growth areas amid changing consumer demand.
  • As exemplified by SlimFast, these carve-outs create opportunity for private equity groups to add value to divested companies, especially well-known brands that may have fallen out of favor due to changing consumer demand.
  • Investors that can identify high-potential assets, and make necessary changes to revitalize their brands, can enjoy substantial return on investment. 

Large food industry corporations are increasingly divesting non-core or slower-growth assets so that they can focus on growth. That creates opportunity for private equity investors to unlock the growth potential of those assets, which are often well-known brands with storied histories. Here, Tim Alexander, a managing director, and Ryan Freeman, a director, both of the Harris Williams Consumer Group, discuss when and how corporate carve-outs in food can be high-potential investments, as well as the tactics private equity can employ to maximize their returns.

The Rise in Carve-Outs

Within the food industry, corporate carve-out activity is intensifying as large food companies hunt for new growth areas amid changing consumer demand. Over the past 10 years, there's been a fundamental shift in the way consumers are eating, which has caused many larger companies to shift strategy to focus on new growth areas.  

“Large corporations are under a lot of pressure to pivot toward growth,” says Alexander. “There are pockets of growth in food due to changing consumer preferences and the innovation that has occurred in the last several years. But, in order to pivot to growth, large corporations often need to couple acquisitions of smaller assets with larger divestitures.”

Sometimes, these divestitures involve on-trend businesses with good growth potential, but they simply lie outside the company’s core focus areas. A great example is Bolthouse Farms, which was acquired by Campbell Soup in 2012 for $1.55 billion. Moving into fresh food was part of former CEO Denise Morrison’s strategy to take cash flow from Campbell’s profitable but slowing soup business and invest it into more on-trend areas of the grocery store. But the fresh food industry was not a good fit for Campbell as it requires expertise that Campbell lacked. In addition, farms are subject to acts of nature, such as drought, which can be challenging to manage against the predictability expected by investors. In April 2019, Campbell signed a definitive agreement to sell Bolthouse Farms to an affiliate of Butterfly Equity, a Los Angeles-based private equity firm, for $510 million.1

Corporations also often reduce attention and investment on established, slower growth brands as they keep their eye on new growth. Freeman points out that “these brands don’t get the marketing or R&D investment they need to keep growing, and it becomes a self-fulfilling prophecy—the performance of these assets slips and that drives a desire to divest them.”

All of these factors are driving a rise of corporate carve-outs (Figure 1) that is putting a flow of slower-growth but often well-known brands with steady cash flow on the market. For example, Unilever recently divested many of its food assets with the exception of ice cream and some condiments. Divested brands include Skippy, Wish-Bone, SlimFast, P.F. Chang’s and Bertolli frozen meals, and Country Crock. Conagra divested Wesson, Ragu and others; Kellogg divested Keebler; Tyson divested its frozen bakery business (Sara Lee and other brands); Danone divested Earthbound Farms and Stonyfield Organic—and the list goes on.

Figure 1: M&A in Food on the Rise

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Source: FactSet

The Divested Brand Opportunity

Corporate carve-outs create opportunity for private equity groups to add value to divested companies. Freeman notes a market misconception: “A common assumption is that if the corporate owner doesn’t want the asset anymore, the company isn’t of value. This isn’t true. There is often significant value that is waiting to be unlocked.”

Corporations know these brands still have potential. As such, it is increasingly common for sellers to retain an equity stake in the business. Says Alexander, “We have seen carve-outs sold to private equity —such as Jenny Craig and SlimFast—where the seller retained an equity stake in the divestiture. Why? Because they knew there was something fundamentally good about the business that in other hands could generate value and they wanted to ride that lift.” 

And despite a common belief that carve-outs typically go to other strategics, private equity groups are increasingly competitive. “Just because there is an asset that could fit well with another strategic out there, private equity firms shouldn’t give up on it,” notes Freeman. “Private equity can bring more certainty and speed to a transaction. When you have a corporate seller to whom speed of divestiture is really important, that can win the day.”

Real-World Value: SlimFast

slimfast-kainos-glanbia.gifKainos’ acquisition of SlimFast is a great example of a private equity firm’s success in creating value from a corporate carve-out. When Unilever put SlimFast up for sale in 2014, the assumption was that a strategic would pick it up. Instead, Unilever sold it to Kainos Capital, a middle market private equity firm with an exclusive focus on the food and consumer sector. When Kainos acquired SlimFast it simultaneously acquired Hyper Network Solutions (HNS). In 2018, Kainos sold SlimFast along with HNS to Glanbia plc at a 15x multiple. As Andrew Rosen, Managing Partner of Kainos, affirms, “This team, combined with our own internal resources, did a great job revitalizing the brand.”

Before Kainos acquired SlimFast the brand had strong consumer awareness, but when it started to stagnate, Unilever didn’t respond or innovate and the brand declined. Here are some of the things that Kainos did to resuscitate SlimFast and drive its growth and profitability.

  • Redesigned the brand proposition: Kainos positioned the SlimFast brand to be more on trend, reflecting consumer interest in low sugar, high protein and energy, and changed packaging to appeal to a broader population.
  • Revitalized marketing: Strategic marketing initiatives reminded consumers of SlimFast’s longstanding ability to aid weight-loss goals and leveraged clinical studies that demonstrate the effectiveness of SlimFast products. Marketing changes included a new channel strategy, greater availability, a new pricing strategy, new product launches and updated packaging. For example, changing the bottle to be more gender-neutral had a positive impact on capturing the male demographic.
  • Invested in new product development: SlimFast launched several new products, including SlimFast Advanced—a low-sugar, high-protein formulation—and a caffeinated variation called SlimFast Advanced Energy to target the energy drink market. They also launched a SlimFast Keto line that fits ketogenic guidelines and targets those on the popular keto diet. 

Observed Freeman, “Under Kainos’ ownership, SlimFast was able to listen to its consumers and react quickly from a new product development standpoint. When the company started to become more innovative the business began turning around.” Results show the strategy is working: For the past three years SlimFast was one of the fastest-growing brands in the weight management category in the U.S. and one of the largest brands in the UK.

Conclusion

The SlimFast turnaround and others like it attest to the investor opportunities available from corporate carve-outs in the food segment. Investors that can identify high-potential assets, and make necessary changes to revitalize their brands, can enjoy substantial return on investment. As Alexander concludes, “Carve-outs are on the rise as large food companies seek new pockets of growth, and divested brands can be great investments.”