Macfarlanes have recently advised Darwin Private Equity and Management on the sale (exit) of Maxinutrition Group Holdings Limited (Maxinutrition) to GlaxoSmithKline (GSK) for £162m. The Macfarlanes team was led by Luke Powell with competition partner Marc Israel advising in relation to the OFT filing. Nabarro was acting for GSK on the competition law side, which was subject to approval from the Office of Fair Trading. Slaughter & May acted for GSK. The exit is three years to the day since Darwin acquired the business for £75m.

Commercial rationale

GSK is a world-leading healthcare group engaged in the development, manufacture and marketing of pharmaceutical and consumer healthcare products. Its shares are listed on the London Stock Exchange and the New York Stock exchange. GSK has its corporate head office in London with operations in 120 countries and products sold in over 150 countries. GSK’s global turnover in 2009 was £28,368 million, and includes well-known brands such as Lucozade.

Maxinutrition, a European sports nutrition company, supplies and distributes sports nutrition products. Its main brand is Maximuscle. It is currently Europe’s leading sports nutrition business in market share terms and recorded a sales total of 36 million in the most recent fiscal year, as well as achieving a compound annual growth rate of 21% in the last three years. In its last financial year, Maxinutrition’s UK turnover was £34.9 million.

The sports nutrition market appeals across a broad spectrum of consumers from elite athletes to sports participants and those seeking additional nutritional supplementation.   Through this share acquisition, GSK will are investing in Maxinutrition’s science-proven products to extend the growth of Maxinutrition within its UK and European infrastructure and expand to the global marketplace, where GSK already has proven success.

The acquisition is further a demonstration of GSK’s strategy to expand its Consumer Healthcare business through appropriate “bolt-on” acquisitions which meet their strict financial criteria. Maxinutrition is a fast growing, focused sports nutrition business with excellent growth prospects and a strong management team – it’s a natural fit for GSK and its ambition to extend and expand its Nutritional Healthcare business.  GSK’s strong commercial and R&D capability, coupled with a strong record in investment in expanding their global nutritional healthcare franchise in new markets and territories, does offer substantial new opportunities to develop the Maxinutrition brands and continue to deliver impressive growth in the coming years.

Legal Awareness

This transaction shows the importance of both commercial awareness and legal awareness to furthering the business ambitions of the commercial parties involved: Maxinutrition and GSK. The three major components are the private equity, share acquisition and competition issues. These are described below.

1. Private Equity

The Macfarlanes private equity lawyers are highly-regarded specialist lawyers in all areas who hold the key to private equity, including funds, financial services regulation, tax structuring, pensions and environment. As private equity transactions become increasingly international, their international legal network ensures that they can offer commercial clients access to the best lawyers at the best independent firms in the world.

The history is that Darwin Private Equity and Management acquired Maxinutrition in 2007. Hogan Lovells acted for Zef Eisenberg and Paul Hick, the founder and the former chairman of the business respectively, who both retained stakes in the business when it was sold to Darwin Private Equity in December 2007. Hogan Lovells had also acted on the original Darwin MBO, advising previous owners Piper Private Equity and the selling shareholder group on the sale of the business.

For an introduction to private equity, please see the Legal Aware debt finance page here.

Share acquisition

On 10 December 2010, GSK and Darwin signed a conditional Share Sale Agreement under which GSK agreed to acquire the entire issued share capital of Maxinutrition, for a consideration of approximately £162 million. As a result of this transaction, the enterprises GSK and Maxinutrition will cease to be distinct.

For an introduction to share acquisitions, please see the Legal Aware share acquisitions page here.

Competition issues

This proposed transaction was not referred to the Competition Commission under section 33(1) of the Competition Act. In successfully obtaining approval from the OFT, the parties submitted that the relevant product markets are the supply of soft drinks, within which the sports and energy drinks segment is most relevant, and the supply of sports nutrition products. In any event, the OFT did not believe it was actually necessary to define the precise product scope in this case since no material competition concerns arise howsoever defined.

On the basis that:

(1) there are only nominal increments caused by the merger in the supply of sports and energy drinks, the supply of sports nutrition products, and the supply of energy and nutrition bars in the UK;

(2) the parties cannot, and are not considered to be close competitors; and

(3) no third parties raised any material concerns,

the OFT did not consider that the proposed transaction gives rise to a realistic prospect of a substantial lessening of competition on the basis of horizontal unilateral effects.

Conglomerate effects

The OFT also considered “conglomerate effects”. As stated in the OFT’s Merger Assessment Guidelines, mergers between firms producing complementary products may give rise to anticompetitive effects if they enhance the merged firm’s scope for tying or bundling. In such a case, customers would have an incentive to buy the second product from the merged firm (where they may not do so if purchasing both products separately), such that rivals in the second product market would be at a disadvantage. The OFT looked at the ability, incentive and the effect of such a strategy. The OFT did not consider that this particular merger created or strengthened the ability of the merged firm to foreclose others by tying or bundling. In particular, the OFT notes that the customer base and distribution channels for sports and energy drinks are significantly different from that of sports nutrition products.

For an introduction to competition, please see the Legal Aware competition page here.

For more information about this transaction, please refer to the Macfarlanes website here.