Fortitech Deal Fills Gap In DSM’s Nutritional Portfolio
This article was originally published in The Tan Sheet
Executive Summary
DSM’s announcement of its $634 million cash acquisition of Fortitech follows the firm’s report that its nutritional business was the key sales driver in its latest earnings period. Fortitech adds macro-blend manufacturing for human nutritional products to DSM’s supply chain.
Royal DSM NV’s latest acquisition, U.S. firm Fortitech Inc., fills the only gap in the global health, nutrition and chemical materials manufacturer’s nutritional product portfolio, providing macro blends for dietary supplement and food products.
DSM announced Nov. 8 a $634 million (€495 million at same-day exchange rates) cash acquisition of Schenectady, N.Y.-based Fortitech. In a Nov. 6 earnings report DSM noted its nutritional business was the key sales driver in its latest period.
According to a presentation by DSM executives, Fortitech adds macro-blend manufacturing for human nutritional products to DSM’s supply chain. The presentation says the macro blend products include common supplement ingredients soy and whey proteins, botanicals, calcium and fiber.
DSM already has a presence in other areas of supply-chain capabilities Fortitech brings – pre-mixes for food, beverages, infant nutrition and supplements – and its Tortuga business provides macro blends for animal products.
“With Fortitech, DSM will be able to deliver customized food ingredient premixes and blends to our customers while at the same time strengthening our international footprint,” Leendert Staal, president and CEO of the DSM Nutritional Products business, stated in a release.
Netherlands-based DSM said the deal brings its spending over the past two years on acquisitions to $3.6 billion, including $3.1 billion in the nutrition space. Most recently, DSM reached an agreement to acquire [Cargill Inc.]’s cultures and enzymes business for $1.1 billion.
The firm also added nutritional supplement properties including Martek Biosciences Corp., which makes omega-3 oils for infant formula, for $1.1 billion in December 2010, and [Ocean Nutrition Canada Ltd.], another omega-3 ingredient firm, for $532.6 million in May 2012 (Also see "DSM Makes Waves In Omega-3 Fish Oil With Ocean Nutrition Pick-Up" - Pink Sheet, 21 May, 2012.).
Fortitech, which launched in 1986, also expanded this year. In March, it opened a Shanghai office to support growing demand for fortified foods in China. The office is Fortitech’s first in China and is supported by the firm’s lab facilities in Malaysia (Also see "In Brief" - Pink Sheet, 2 Apr, 2012.).
According to the firms’ joint release, Fortitech’s expected 2013 net sales are $270 million, and earnings before interest, taxes, depreciation and amortization are projected at around $70 million. In addition to its New York and Malaysia facilities, Fortitech has production sites in Brazil, California, Denmark and Poland.
Fortitech will become part of DSM Nutritional Products’ Human Nutrition and Health business. The firms expect the deal to close this year.
Nutritionals “Persistently Strong”
During DSM’s fiscal 2012 third-quarter earnings call Nov. 6, Chief Financial Officer Rolf-Dieter Schwalb said the nutrition business’s “persistently strong performance” shows the success of the firm’s strategy to expand in the space.
Schwalb said DSM’s life sciences business accounted for 76% of third-quarter EBITDA, “mainly driven by our Nutrition cluster,” which increased $33.3 million from the year-ago period to $258.7 million, driven by higher margins, favorable exchange rates and the addition of Ocean Nutrition Canada revenues. Margins in the nutrition businesses’ EBIDTA grew 21.4%, within the firm’s target range of 20% to 23%.
According to DSM’s earnings statement, nutrition net sales grew 9% to $1.2 billion, while its pharma and performance material businesses were flat and its polymer intermediary business was down 19%.
DSM said prices for its human nutrition and health products were up slightly while volumes remained stable. Nutritional lipids showed strong growth outside North America and the integration of Ocean Nutrition Canada is on track with sales of $28.4 million and EBITDA of $10.2 million.
The flat or slumping results from DSM’s other divisions kept its overall net sales flat, down 1% to $2.3 billion, and pushed its net profit down 53% from the year-ago period to $103.7 million, according to the firm. Other contributors to the net profit slide included a $10 million increase in net finance costs from the year-ago period to $29.5 million.
DSM said it also looks to its nutrition businesses, which show resilience with 2012 EBITDA expected to exceed 2011, to drive growth in 2013 as “the outlook for the global economy remains uncertain.” The Martek, Ocean Nutrition Canada, Cargill and other acquisitions since the end of 2010 “will create considerable economic value for DSM while increasing the resilience” of the firm’s earnings, according to the earnings statement.