Atkins Nutritionals Redux

The original buyout of Atkins Nutritionals was one of the worst private equity deals ever transacted. Even worse than Refco. And now it’s back in private equity hands, after having spent several post-bankruptcy years controlled by first-and-second lien holders. Certainly a curious move by new owner North Castle Partners. And brave. And possibly stupid.

For the uninitiated on Atkins, I’ve posted a backgrounder here. The brief version is as follows: Parthenon Capital and Goldman Sachs acquired Atkins in October 2003, via a $533 million leveraged buyout. The deal ultimately caused Parthenon to pay Summit Partners $20 million for violating a deal-sharing arrangement – which was chump change compared to what it lost when the company went belly-up in the summer of 2005. The debacle helps explain why it took Parthenon several years to close its third fund, and to do so $300 million shy of its $1 billion target.

Fast forward to yesterday, when North Castle announced that it was buying Atkins from its bondholders. To be clear, North Castle may be the best possible firm to have bought Atkins. It has an exclusive focus on “healthy living and aging” companies, and has some past nutritional experience with Leiner Health Products, EAS and Naked Juice. Moreover, former EAS and Naked Juice CEO Monty Sharma will be put in charge of Atkins.

North Castle managing director Lou Marinaccio says that his firm “didn’t spent a lot of time trying to understand Parthenon or Goldman’s ownership… We were focused on what had happened post-bankruptcy.” Ok, but past of Parthenon and Goldman’s problem was that Atkins is an inherently tricky company. First off, national diet trends are best described as national diet fads. In fact, one big reason for Atkins’ original troubles was the death of its namesake – who was rumored to have died from a heart attack (he did suffer one in 2002, but died one year later from hitting his head after slipping on some ice). Positive scientific studies are great, but they aren’t what drive the national consciousness.

But that isn’t my main beef (no pun intended). Instead, it’s that Atkins disciples do not actually need to buy anything from Atkins Nutritionals. They can get the basic diet plan online, and make the food themselves. Or buy them from other vendors. In fact, I have a friend who successfully used the Atkins diet to shed double-digit pounds, but he never bought a single Atkins-branded product.

Marinaccio responds thusly: “The angle we took was a bit different. If the diet works, then the brand is going to have real value… We don’t need every customer who utilizes a low-carb diet. So let’s flip your argument on its head: Who are the customers actually buying Atkins today? They are very loyal folks who use Atkins products as a component of their weight management, and they keep coming back to the diet when they need to. It is a business that we see as trending in the right direction.”

The Blackstone Group advised Atkins on the deal, while AbleCo Finance LLC provided leveraged financing. As an interesting side-note, Marinaccio says that the debt deal was signed after the credit crunch began.