Room to Run
Does this sound familiar to you? Many of us make fitness-related resolutions for the new year – and the trend toward healthy dieting and increased activity is not likely to change course any time soon. A July 2013 study from the Journal of the American Medical Association reported that Americans are living longer than they did twenty years ago, but they aren’t as healthy as citizens of other developed nations. Mortality rates associated with obesity and chronic diseases such as diabetes and high blood pressure are on the rise. And it’s the root of our growing healthcare cost – according to The Brookings Institution, healthcare costs will continue to grow at 1.2% ahead of U.S. GDP for the foreseeable future, and healthcare expenditures will account for 25% of GDP in the next 20 years.
These statistics spotlight the importance of a healthy lifestyle. Over the past few years, there has been a tectonic shift toward healthier eating and a renewed focus on health and disease prevention. More people acknowledge and accept the fact that a healthy diet, such as paleo and primal eating plans, and exercise routines will lead to improved quality of life over the long term. These shifting attitudes are leading to strong demand for innovative products and services that promote health and wellness. And as a result, new platforms, aspirational brands and disruptive business models are emerging that generate above-average growth and attractive returns on capital.
“Healthy” New Year’s resolutions can dramatically improve our quality of life, but they could have a much larger impact on the markets in 2014. A healthier population could translate into a healthier marketplace for innovative Health and Fitness companies – and potential opportunities for investors focused on businesses that provide a differentiated “reason to be.”
Current Trends in M&A
The past 30 years have been remarkably prosperous for investors. Aside from the “bursting” of the dot-com bubble in 2002 and the more recent downturn of 2008–2009, the past three decades have been a period of unprecedented wealth creation. And thanks to declining interest rates, increased productivity and an explosion of innovative products and services, today’s equity markets continue to hit fresh all-time highs.
Rising stock prices are encouraging companies to pay attention to – and consider acquiring – strong performers. Strong valuations can help companies make a case for raising new capital or encourage acquirers to consider purchasing their business. While 2013 M&A transaction volume was below prior years’ highs, the level of deal activity was significant and we plan to closely monitor this area in 2014.
Combined with relatively stable market volatility, these trends are laying a strong foundation for strategic transactions in the Healthy Lifestyle sector. Many corporate acquirers have solidified their balance sheets and have a significant amount of cash on hand that they can easily draw on to pursue a merger or acquisition.
However, financial sponsors are becoming much more active and aggressive acquirers, competing with corporate buyers in new ways that are making the Healthy Lifestyle sector an increasingly competitive space. Thanks to record levels of non-invested private equity capital and the advent of several consumer-focused investment funds, these sponsors are often able to offer valuation multiples that compete with or exceed those offered by strategic buyers. High-performing companies will likely continue to receive attention from acquisition-hungry investors in 2014, creating a competitive – and robust– climate for Health and Fitness M&A transactions.
Key Themes to Watch for in 2014
Baird’s Consumer Investment Banking team believes the Health and Fitness sector will continue to present attractive M&A opportunities for investors in 2014 that redefine the industry and provide differentiated and compelling products and services. We believe these key investment themes will characterize activity and the future direction of the Health and Fitness industry in the new year:
- M&A as a path to future growth
Corporations are using acquisitions as a pathway to future growth. A 2013 RBS Citizens survey found that 55% of companies were open to the possibility of making an acquisition. What’s more, 24% of companies were currently engaged in such a transaction. This strong appetite for strategic transactions1 will create extraordinary opportunities for Health and Fitness companies, entrepreneurs and consumer-focused private equity investors in the new year.
- Omni-channel distribution
Brands with comprehensive distribution capabilities will continue to be very attractive to investors. In particular, we see a number of very compelling opportunities in the fitness accessory category. A number of sophisticated wholesalers are gaining market share in accessory categories such as belts, gloves, medicine balls and the like. Given that accessories are traditionally very profitable for retailers, investors will likely pursue companies that could give them access to related high turns and attractive gross margins per square foot.
- Strong brand communities
Today’s Health and Fitness consumers don’t just want high-quality fitness content and customized personal service – they also want to feel a genuine connection to the brands they’re devoting their time and discretionary income to. A number of studio fitness brands, such as CrossFit, Shred 415 and Soul Cycle, provide high-intensity fitness programming in a group setting. This unique model encourages a strong social unit among participants (both inside and outside of the gym) and will remain extremely desirable for potential acquirers.
- Consolidation of retailers
The Health and Fitness industry continued to consolidate in 2013, as the mid-price health club market continues to be pressured as consumers increasingly opt for luxury gyms, low-price clubs and/or studio fitness clubs. Larger players may target smaller health club chains in order to acquire complementary offerings for their existing infrastructure or increase their brand’s overall footprint in key geographic markets.
- The next big category disruptor?
The aging U.S. population, an increasing rate of obesity and chronic disease, skyrocketing healthcare expenditures and rebounding consumer confidence are causing consumers to focus on their diet and incorporate fitness and wellness activities in their daily routines. These factors are also setting the stage for an explosion of new, innovative business models, making it increasingly likely that we’ll see new products and services with the potential to markedly improve some of these complex health and wellness issues.
- Innovation will remain a hot commodity
Shifting consumer preferences are driving demand for innovative fitness brands with proven efficacy and customized solutions. Take the rise of alternative fitness activities such as P90X, Zumba, and even yoga and Pilates. Their increasing popularity reflects consumers’ desire for relevant, impactful fitness content and instruction. Disruptive business models that capitalize on this demand for customized fitness products and services will remain very attractive for potential investors and create enormous scarcity value.
- The pursuit of global relevance
International corporate buyers are actively seeking opportunities with the potential to drive future growth and complement their existing assets. Western brands with access to the stable North American market and well-established recognition will continue to be highly desirable targets for acquirers looking for a way to increase their global visibility.
- Expansion of fulfillment and supply chain capabilities
Corporations are not only looking to M&A to fuel their growth – they’re also turning to strategic transactions as a means of improving their order fulfillment and supply chain capabilities. The aforementioned RBS Citizens survey found that 41% of companies viewed acquisitions as a way to achieve “operational efficiency improvements.” The same percentage rated acquisitions as a viable way to attain “products or services adjacencies.” We expect to see similar corporate development attitudes in 2014.
The outlook for the Health and Fitness industry remains positive for 2014. The economic trends that propelled the industry to new heights in 2013 will likely continue throughout the new year. Meanwhile, the ongoing recovery of the U.S. and European economies should continue to support the Health Fitness sector’s growth – a very welcome trend for those of us with fitness resolutions and regimens to keep up in the first few weeks of this year and beyond.
1 RBS Citizens Middle Market M&A Outlook 2013. Based on survey of 330 U.S.-based middle market firms (n=330).