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All-natural profits: Why Nestlé paid $2.3-billion for Montreal vitamin maker Atrium Innovations

In this file photo Nestlé's directors speak in front of the Nestlé's logo during the general meeting of Nestlé Group, in Lausanne, Switzerland. The company says it is buying husband-and-wife startup Sweet Earth, which sells frozen burritos stuffed with quinoa, beans and other vegetarian ingredients.

Laurent Gillieron/AP

With consumers embracing healthier lifestyles and conglomerates scrambling to keep pace with fast-changing food choices, global giant Nestlé SA is shelling out $2.3-billion (U.S.) to acquire Montreal's Atrium Innovations Inc., a privately owned company that specializes in natural and organic nutritional products.

Once publicly traded, Atrium was taken private in 2014 for $751-million (Canadian) by European private equity firm Permira, which kept the Caisse de dépôt et placement du Québec and Fonds de solidarité FTQ as minority partners. Close to four years later, Atrium is being sold for more than three times as much, rewarding a new management team for its turnaround efforts. The sale price also speaks to legacy companies' incredible appetite for new, high-margin "lifestyle" brands.

When Permira first acquired Atrium, its stock price had sagged after revenue growth plateaued from previously scorching levels and the company wrestled with a changing regulatory environment in Europe. In Germany, one of its best-selling anti-inflammatory products, Wobenzym, a natural Aspirin alternative, had to be relabelled and reformulated, which hurt sales.

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Atrium launched a strategic review in the second half of 2012, and, over the course of 12 months, four separate bidders – three private-equity firms and one unnamed strategic player, potentially a conglomerate – made offers to buy the company.

Permira was ultimately successful, paying $24 a share.

Under private ownership, a new management team was installed at Atrium, led by chief executive officer Peter Luther, who had previously served as Johnson & Johnson's consumer health-care head. Its immediate focus was to squeeze better sales from Atrium's best-known brands: Garden of Life, which makes non-genetically modified, certified USDA Organic vitamins and oils; and Pure Encapsulations, which produces hypoallergenic supplements that have no artificial sweeteners.

The company also launched a new brand of probiotics and expanded its global reach with an entry into China.

Nestlé, meanwhile, has been under pressure from an activist investor, and rival conglomerates have been swallowing up-and-coming natural-food companies. Campbell Soup Co. acquired Plum Organics in 2013, while Hormel Foods Corp. acquired Applegate Farms in 2015.

Parent companies of historical brands are "getting squeezed on price everywhere in their businesses, except in organic food, so they're going out and paying big multiples" for newer organic and lifestyle players, said Kenric Tyghe, a consumer and retail analyst at Raymond James. When Atrium was taken private in 2014, its purchase price amounted to 1.5 times sales over the previous twelve months; Nestle is paying 3.3 times annual sales.

Such multiples are arguably justified, however. Natural foods are "one of the very few places they have any real pricing power," Mr. Tyghe added, with gross margins on nutritional supplements often hovering around 50 per cent.

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Because the purchase price is so rich, Quebec institutional investors stand to make a tidy profit from the deal. Fonds de solidarité FTQ first invested in Atrium in 2000, and added repeatedly over the years. The labour fund has plowed a total of about $60-million worth of equity into the company, and has also provided loans, said spokesman Patrick McQuilken. The fund should make a net return of about $240-million (U.S.) on its 12.5-per-cent stake, but the Fonds does not disclose returns on its specific investments.

Caisse de dépôt et placement du Québec rolled over its 12.5-per-cent equity stake in Atrium together with the Fonds in the 2014 private-equity buyout. A spokesman for the pension-fund manager declined to confirm the return it will make on its investment.

Atrium launched in 1999 as a subsidiary of AEterna Laboratories Inc., now known as AEterna Zentaris Inc., and was fully spun off in 2006.

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