What Pacific Equity Partners’ Purchase of Manuka Health Says About the Health Foods Industry

Private equity fund Pacific Equity Partners has made an interesting new purchase. They’ve signed a deal to acquire Manuka Health, a New Zealand based company focused on Manuka honey products.

The New Zealand Herald reports that the purchase price was NZ$110 million.

Manuka Health was founded in 2006. It has grown remarkably fast since then. In 2012, its sales totalled around NZ$17 million. Today, annual sales are around $70 million. Along the way, it has built a NZ$10 million processing facility in Te Awamutu, not far from Hamilton, on the north island. Staff numbers have quadrupled. The product range has expanded. Items now available include propolis, royal jelly, pollen, skin care products, and even medical grade Manuka honey solutions.

Manuka Health was always going to be targeted for acquisition. Smaller New Zealand firms have bought minor stakes in the past three years. But the company needed a bigger partner to help it go global. Founder and CEO Kerry Paul started the business out of his living room. Paul has been lauded for his efforts in introducing the world to Manuka. But he doesn’t exactly have the background to take it international. In announcing the deal, the company said that ‘The next phase for the business was to seek a partner with the experience and resources to assist the company in delivering on its global growth aspirations.’

The company noted that PEP’s involvement would help them chase growth goals in China, the US, Germany, Japan, and Australia, as well as at home in New Zealand. Resources are also required to continue developing new products. Especially personal care and wound treatment products.

As we embark on this next phase, we believe PEP with its extensive experience nurturing New Zealand brands is the ideal partner to provide financial input to boost R&D, including clinical trials and help us establish our suite of natural healthcare products globally,’ said Mr Paul. His long term aim is for Manuka Health to be a household brand worldwide.

PEP also commented on the deal, revealing why they’d chosen Manuka Health. ‘Manuka Health is an exceptional business in the high growth natural healthcare sector which is underpinned by a number of compelling macro trends including increasing nutritional health awareness and a rise in consumer affluence,’ said PEP managing director David Brown.

He’s not wrong about those macro trends. In markets around the world, burgeoning middle class populations are spending more than ever on natural health products. This is particularly noticeable in China, one of Manuka Health’s big target markets. Deloitte expects health care spending in China to rise an average of 11.8% per year from 2014 to 2018. Analysts at McKinsey expect spending to reach US$1 trillion by 2020.

Current prices for Manuka in China are almost ridiculous. The insane price tags have helped make Manuka honey a status item, as well as a trusted nutritional health product. Last week, the BBC reported prices up to RMB1,789 for a 500g jar. That’s around $397.

What is Manuka honey, and why is it so special?

Manuka honey is a monofloral honey, meaning it is produced from the nectar of just one type of flower. That flower is the blossom of the Manuka tree. Otherwise known as tea tree. It is produced by ordinary European honey bees.

Manuka honey is naturally high in methylglyoxal. This compound is believed to have potent antimicrobial and antibacterial properties. It creates a natural hydrogen peroxide, which kills pathogens. Unlike the antibacterial compounds in normal honey, it’s heat and light stable. Several in vitro studies have been done, testing Manuka on wound pathogens. However, there haven’t been many clinical trials.

Some of the ‘healing’ power may be due to its viscosity. Even regular honey can help form a protective barrier, thanks to its texture. Manuka honey is especially thick. As a humectant (moisture binder), it can help keep an injured area moist and supple, not cracking or contracting. Manuka Health links to a select range of research, if you’re interested.

The honey itself is used in a variety of ways. It can be applied topically to the skin as a balm, for minor burns, bites and cuts. It can be eaten on its own, to help soothe a sore throat or upset tummy. It can be added to small-batch recipes, as it can be heated. Some natural beauty advocates use it as a facial masque. It is a popular treatment for acne and rosacea. A manuka honey facial at an upmarket Sydney spa can cost around $80.

One of the most exciting potential uses is wound care. Specifically, care of wounds that aren’t responding to conventional antibiotics. Wounds infected with pathogens resistant to currently available antibiotics.

This phenomenon was first demonstrated in 1981 by Dr Peter Molan. Over the years, scientists tried to identify and isolate the active compound/s. If you’re interested, you can read a pretty thorough literature review here. In 2013, researchers at UTS published an important study in leading journal PLoS One. The research demonstrated that the dangerous MRSA virus did not become resistant to the honey. Other international studies have produced similar results. Though as mentioned above, an extensive clinical trial is yet to happen.

Manuka Health has three different wound care products. There’s a wound dressing, breast pads for breastfeeding mothers, and a wound gel made with honey and a gelling agent to improve consistency. Other producers targeting medical practitioners have developed a range of similar formulas. For example, Australia’s Defries Industries makes fabric dressings impregnated with medical grade Manuka. It also sells 25g tubes of honey.

What other specialty products are hot right now?

Manuka honey isn’t the only lucrative specialty product racking up sales in Asia. One strong contender is specialty dairy.

Unlike commodity dairy, gourmet milk and cheese products can be sold with a hefty mark-up. It’s not just the nutritional value of the products — it’s the luxury edge. That’s partly due to the success of ‘brand Australia’. Dairy marketing boards have been able to capitalise on food safety fears and predilections for luxury at the same time. Thanks to the efforts of a variety of stakeholders, Australian dairy is seen as ‘clean and green’. And exports take a variety of forms. For example, there’s baby formula. Organic baby formula maker Bellamys [ASX:BAL] now derives a large proportion of its revenue from China. And its share price has risen 345% over the year to date. Privately owned Barambah Organics, a no-kill dairy in Queensland, currently exports to Hong Kong, Singapore, Malaysia, and Brunei.

Organic meat is also a big deal. Australia exports a lot of it to Asia. Especially countries without spare land for cattle. Aussie organic minced beef sells in upmarket Hong Kong food stores for HK$250 per kilogram. That’s over $45. For mince. Organic oxtail goes for the equivalent of $112 a kilo. But newly wealthy Asian customers are willing to pay the price.

australian meat hong kong store
Source: greatfoodhall.com
[Click to enlarge]

Where are the investment opportunities?

In Manuka honey specifically, there aren’t many options on the ASX. Current small-cap darling Capilano Honey [ASX:CZZ] only has two manuka products. But there opportunities with small-caps specialising in other hot specialty products.

The one thing they all have in common? They’re small-caps.

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Eva Mellors
Contributor, Money Morning

Money Morning Australia