North Castle Makes Atkins Tastier and Gets 5X Return

Today, I was shocked by the following deal news: North Castle Partners has sold Atkins Nutritional Holdings to Roark Capital.

Was this the same Atkins that nearly took down Parthenon Capital several years ago? Wasn’t North Castle widely ridiculed for buying Atkins? Yes and yes. But North Castle is making a 5x return on their investment, says Lou Marinaccio, a managing director, who could barely disguise his glee. “It’s been a fun three years and clearly, it’s a great result,” he says. “We’re really proud of the business.”

First, the basics of the deal. North Castle owned a majority of Atkins, while management also owned a stake. Roark is buying a controlling stake while management is rolling over a portion, Marinaccio says. The transaction closed Wednesday.

Atkins, which is known for its low-carb diet, has a scandalous past with private equity. Earlier this decade, the company was a hot name in the diet world and it seemed like everyone was trying the low carb diet. It was so hot that, in 2003, Parthenon acquired a majority stake in a $533 million LBO. Goldman Sachs Capital Partners also invested (Parthenon and Goldman reportedly invested $150 million equity and are believed to have lost much of that). Just two years later, the low carb fad had faded, and Atkins sales crashed to $200 million from $700 million in 2004.

The diet company filed for bankruptcy protection in 2005. In the winter of 2006, Atkins emerged from Chapter 11 and was owned by its lenders. North Castle, which invests in small cap consumer companies, acquired a majority stake in 2007 for $100 million, a person said.

So how did North Castle make a success of a faded company? First, the PE firm got comfortable with the science behind Atkins. North Castle built an advisory board of experts from the medical, nutrition and science fields to review the data behind Atkins. Much of those findings and experts are now available on the Atkins web site. Then, while North Castle was conducting due diligence for the deal, Atkins management and employees actually tried the diet, Marinaccio says. They successfully lost an average of 15 pounds each, he says. “The results you get on Atkins tend to be pretty quick,” he says.

Satisfied that the diet works, North Castle set upon its next task: improving the taste of Atkins foods. The company provides a variety of recipes, eating plans, books and products to help users adhere to its low carb diet. However, Atkins products –which include snack bars, shakes and even a bread mix–tasted “terrible,” Marinaccio says.

Luckily, the Atkins management team was comprised of the same executives who headed Naked Juice, a former North Castle portfolio company that was sold to PepsiCo in 2007. Atkins management began using higher quality proteins and ingredients in Atkins products, which also underwent a battery of consumer tests. “The tastes are now better so we make a better product,” Marinaccio says.

North Castle then rebuilt the Atkins brand and retooled the diet to make it more modern in terms of food that users are allowed to eat (the new Atkins diet emphasizes leaner proteins, chicken and fish as well as beef. More leafy, green vegetables are also encouraged, Marinaccio says). The PE firm then overhauled the Atkins website to better communicate how users can live on the diet. And, for the past 18 months, the company has focused on an aggressive marketing campaign targeting traditional and local media.

The reboot seems to have worked. Atkins revenue has doubled to north of $200 million, a person says.

North Castle’s investment in Atkins came from its 2007 fund, which raised $200 million. Marinaccio declined to disclose how much is invested but said the fund has enough for “two to three more deals.” The PE firm plans to start fundraising for its fourth fund next year with a $250 million target, he said.

Dave Iverson, of Lazard Middle Market, advised North Castle.