Glenboden M & A Originations

Drinkable health - is Lifeway ripening in the US ?

Priority Rating priority rating 4
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Origination Status proprietory origination, October 2010
Asset Lifeway Foods Inc. (USA), no.1 domestic specialist in 'kefir' dairy drink
Buyer candidates include Danone, Dean Foods
Seller founding Smolyansky family and public shareholders of Lifeway
Buyer Rationale expansion in functional drinks
Seller Rationale acceptable valuation, timing
NBs Lifeway's sales growth slowed to 7% in Q2 2010
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Lifeway is the leading producer of the functional dairy drink 'kefir' in the US. Functional products are all the rage in developed markets now, making Lifeway an acquisition candidate for the majors. However the company's growth rate has slowed, which impacts its valuation and raises scalability questions.

Strong growth up to 2009 ...Established by a Russian immigrant in 1986, Lifeway specialises in kefir, a fermented dairy drink that's popular in eastern Europe. It claims to have more healthy bacteria than yoghurt.

The company's impressive growth rate up to 2009 was driven by acquisitions, line extensions and new retail channels (see chart).

Respectively in 2006 and 2009, Lifeway acquired its two main competitors in the kefir category, Helios Nutrition and Fresh Made Dairy.

Another driver of growth has been line extensions, with the company now producing kefir in every form - low-fat, whole milk, flavoured, organic, goat milk, Greek style, for kids, frozen, smoothies.

New distribution channels, with major retail chains, have also allowed Lifeway to expand beyond its home market of the Chicago area.

... slowdown and diversification in 2010 ...However, it looks as though Lifeway has now hit a growth barrier. Its sales growth fell to only 7% in Q2 2010, and operating profit has decreased owing to higher costs of marketing and distribution.

The company now appears to be seeking growth through diversifying beyond kefir and dairy. Most notably, in 2010 it acquired the assets of First Juice, which specialises in organic fruit and vegetable juices for children.

This trajectory suggests strongly that there's a limit to the growth potential of a 'one product' company, certainly in the dairy business.

... right time to sell ...So this might be a good time for Lifeway to be sold to a bigger dairy group, since its diversification into non-dairy brings with it new risks and competitors.

Danone heads the list of potential acquirors; that group already holds 20% of Lifeway's shares since 1998.

Another obvious contender is Dean Foods, the largest dairy processor in the US, which recently confirmed its commitment to new categories by acquiring Alpro Soya, Europe's leading producer of dairy-alternative soya drinks, in 2009.

... price could be lowValuation is very hard for a 'niche' company with Lifeway's profile. We've opted for the Alpro Soya deal as a comparative transaction (see valuation), inter alia because of the scalability questions for Lifeway discussed earlier.

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THIS LEAD'S VALUATION
Size (€ mln) 50
Sector drinkable dairy 'kefir'
Asset Quality US niche branded
Seller small plc
Buyer large plc
P/S 1,25
P/Ebitda 7,0
Type value estimate
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