Last week, Glanbia announced its largest acquisition to date with a $350m (€303m) deal to buy SlimFast, a US-based weight management brand. Over 40 years old, Slimfast is one of the leading weight loss brands in the $8bn global health and wellness market.

The business generated sales of $212m (€184m) and earnings (EBITDA) of $24m (€21m) last year, giving SlimFast an earnings margin of 11.3%. With a $350m price tag, the SlimFast business has commanded an earnings (EBITDA) multiple of 14.6 times.

The acquisition will add roughly 20% to the top line of Glanbia’s performance nutrition division, which had sales of $1.1bn in 2017, and is expected to add to earnings in 2019.

Glanbia has acquired this business from Kainos Capital, a Texas-based private equity firm which bought SlimFast from Unilever in 2014. It is understood Kainos paid in the region of $95m to $100m for SlimFast back in 2014.

This is the largest acquisition Glanbia has ever made, eclipsing previous large deals for Optimum Nutrition ($315m) in 2008, BSN ($145m) in 2011 and Isopure ($153m) in 2014, which transformed Glanbia into the global leader in the branded performance nutrition category.

Strategic rationale

Glanbia’s strategic rationale behind this deal is that it will be an adjacency move for the group into the ready-to-drink (RTD) category. Up to this point, Glanbia has had little presence in this category. Around 75% of the SlimFast business is RTD products.

The other reasoning behind the deal, according to Glanbia, is access to the mass channel where it gives them access to customers such as Walmart and Sam’s Club in the US. These are customers that Glanbia’s performance nutrition business has had very little interaction with up to now.

At present, Amazon is the largest customer for Glanbia’s performance nutrition division and it does not sell SlimFast products. It will be interesting to see if Glanbia can convince its largest customer to sell its newly acquired SlimFast range, but equally if it can use its new relationships with Walmart and Sam’s Club to stock its existing performance nutrition products. However, this deal does not come without risks, particularly when viewed against the historical decline in the financial performance of the SlimFast business. In 2000, when Unilever paid $2.3bn (€2bn), or more than 18 times earnings, to buy SlimFast, the business had sales of $611m (€530m) and earnings (EBITDA) of $125m (€108m), with profit margins exceeding 20%.

Since 2000, SlimFast sales have fallen by almost two thirds (-65%) to stand at $212m (€185m) in 2017. The profitability of the business has fared even worse in that time, with earnings plunging more than 80% since 2000 to just $24m (€21m) last year, while earnings margins have dropped from 20% to just over 11%.

Under Unilever, things started to go wrong for SlimFast as dieters moved away from sugary drinks and shakes. By 2005, Unilever had written down the value of its investment in SlimFast by a massive €850m as sales and profits continued to collapse.

By 2014, when Unilever sold the business to Kainos Capital, sales had fallen to just $150m. Over the last four years, Kainos have stemmed the fall in sales with turnover recovering year on year and is forecast to hit around $250m for 2018.

While the $350m paid by Glanbia for the SlimFast brand is higher than what Kainos paid in 2014, it is just 15% of the $2.3bn paid by Unilever less than 20 years ago.

The other standout feature of this deal is that the 11% earnings margins in SlimFast are lower than the 15% margin Glanbia’s existing performance nutrition division delivered in 2017. Glanbia has set margins targets of 13% to 15% in its performance nutrition division to 2022, meaning SlimFast could drag margin performance down. Glanbia said it expects margins in Slimfast to improve in 2018 to about 12%.

According to Glanbia, there will be no significant synergies in this deal, particularly as the business outsources all its manufacturing. Instead, the group sees the deal as a way to broaden its consumer base and move into new channels.

SlimFast is the seventh and largest acquisition Glanbia has added to its performance nutrition portfolio over the last 10 years and brings the total spend on performance nutrition deals to a very weighty $1.4bn (€1.2bn) since 2008.

In that time, Glanbia has evolved from playing in the specialised sports nutrition category towards the more mass market health and wellness sector. This deal further extends that evolution.

Over the last decade we’ve seen how the performance nutrition business has been the engine that has driven growth year after year in Glanbia. Given the scale of this acquisition and the fact that SlimFast is currently a lower margin business than its existing performance nutrition division, Glanbia has work to do in further reviving the SlimFast brand to ensure it adds to the bottom line.