When you hear from a brilliant, learned public company representative, they are legally required to offer a disclaimer that separates their opinions from those of their company.
I’m not public, but I’m not brilliant or learned either, so these views, while not legally required, nevertheless must be taken with a double-grain of salt.
So, in the month before we went to press, there was an interesting flurry of deals that seemed to indicate a hot market in the category. We saw Muscle Milk maker Cytosport finally get sold – for about $450 million – to Hormel, Archer Daniels Midland pay more than $3 billion for Wild Flavors (which owns Capri Sun, in addition to its many ties to beverage companies), and Unilever unload Slim-Fast to a private equity shop (no terms released). We also saw two venerable juice brands change hands: Juicy Juice was sold by Nestle to Brynwood Partners for an estimated $200 million and Apple & Eve (home of the Sesame Street-licensed juice box) get picked up by larger Canadian juice company Lassonde for $150 million.
Without even counting Slim-Fast, that’s nearly $4 billion in capital changing hands for beverage and beverage-related companies. So that means it’s a good time to be selling, right?
Maybe not: certainly, a lot of money is out there languishing in funds – it has been for several years – but with the possible exception of Muscle Milk, these deals didn’t touch the entrepreneurial space from which younger brands spring. Apple & Eve was picked up by a fund nearly seven years ago at a higher valuation than it eventually sold for; Muscle Milk had been around the block repeatedly, with any deal hampered by what some believe were unrealistic expectations on the part of the sellers and also by some longstanding potential legal hurdles. And Juicy Juice? It was sold by Nestle, which has spent the past year shedding brands to shore up an underperforming portfolio.
So why is it that we aren’t seeing entrepreneurial brands get snapped up in equal measure, especially when they can offer more upside? Certainly, analysts and investors have got their eyes on food and beverage – after all, says one reliable banker, people aren’t stopping eating or drinking and as they change their habits new brands will always be a great way for investors to capitalize.
But there’s a big difference between being a company armed with a lot of potential and an established company with a track record and obvious spots where it might offer efficiencies and a profitable set of returns. In regard to strategics, in fact, one repeated observation is that some transactions seem to take place because the greatest efficiency the acquirer could establish would be through killing the acquired brand in order to protect its own core business lines. (Which isn’t to say the owners don’t tend to personally benefit from being picked up by a strategic, of course, just that consumers tend to wonder what happened to the products they’ve come to love.)
And that’s why for most entrepreneurs, early investment is partial – it tends to come from the private equity or venture capital side – they want to see brands get built instead of torn apart. Eventually, of course, the exit has to come from a sale, but the sheer length of time it can take to unload even a high-revenue brand like Muscle Milk should indicate just how much of a lifespan many of these companies have to have before one can reasonably expect to create that “overnight success” entrepreneurs may believe they’ll have.
And it doesn’t mean the private equity or venture capital is a panacea, either; that’s why it might be better to view it all through the lens of “growth capital” – because it creates a frame of mind that’s focused more toward the business than toward the eventual exit.
Look at recent transactions on the smaller end of the spectrum and you’ll get my drift: you see capital raises by brands with differentiated brands or technology, like Kevita, GoodBelly, Suja or Bai. There are a few sensible tuck-ins when brands are taken off the table completely, like when Vita Coco scooped up Coco Café early in the game, or Starbucks and Hain bit early on Evolution Fresh and BluePrint, but those are extremely rare.
So where’s the bright side here? It lies in independence. The biggest success stories of the past few years came through brands that developed independently from big strategic entities and found either patient private equity partners or enough revenue growth that they could dictate their own direction. Vita Coco, Monster, Sparkling Ice, Red Bull, Rockstar, AriZona, 5-Hour Energy, GTs Kombucha, even cooperatives like Ocean Spray and Horizon, all present compelling arguments for the ability to grow a brand by remaining independent. Even Glaceau, the daddy of all the strategic acquisitions, took home its big check after showing that its revenues were at the point where the business could sustain itself. I think strategics’ arms-length approach to many of the two stage deals they’re making shows the respect they have for the independent entrepreneur.
Look, I’m not offering a set of rules for building businesses here; I’m just trying to offer a little perspective – we spend a lot of time talking about the kind of wealth that entrepreneurs land when they exit their businesses, but that can’t be the focus. It’s in building them where they earn the returns they’ll generate, no matter what form the big exit eventually takes.