With its $7.1 billion deal for Frutarom, International Flavors & Fragrances Inc. is deepening its reach in the natural ingredients segment, as well as bolstering access to indie businesses.

In both the beauty business and food, “people are looking more for these natural solutions,” IFF chairman and chief executive officer Andreas Fibig told WWD.

“What we see on the flavors or food side is that everybody’s looking for a clean label…in the U.S. already, more than 90 percent of our briefs we are receiving is for naturals,” Fibig said. “On the fragrance side and on the skin-care side, actually, there’s almost the same trend right now. People are looking more for these natural solutions. With the deal, we are not just getting our flavors, savory or color increased, but we have, for example, some of the active cosmetics in there as well, and some of the more fragrance[-type] business.”

IFF has been homing in on naturals via acquisition for quite some time. Fibig said naturals are already dominating the food and flavors side of the business — and that the beauty side is shifting there, with things like technologies that can increase the yield from crop harvests. “You need five metric tons of rose leaves to make one kilogram of rose essence,” Fibig said. “It’s a problem of quantity, and the better you can position yourself in that field, the better you can deliver good material to customers.”

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The Frutarom deal also gives IFF access to a customer base of smaller firms — something Fibig said he expects will also benefit both sides of the business as smaller, indie players become increasingly important.

“Many of these smaller companies…have a great growth dynamic,” Fibig said. “There is a new customer segment we basically can serve now with our solutions, and do a really aggressive cross-selling of our technology to them.”

When it comes to indies, “food was faster,” Fibig said, “but beauty is catching up.”

“We see more [small and midsize beauty companies] now because…the market entrance barrier is nowadays so low,” Fibig said. “You can have a couple of bloggers to promote your stuff and you get e-commerce and you don’t need doors or [retailer] outlets.”

IFF has an acquisitive history — both on the fragrances and the flavors sides of the operation. It’s possible the Frutarom deal will cause a slowdown in the group’s M&A pace, Fibig said.

“We probably will be more selective,” he said, regarding M&A. “Now we have a great footprint, our technology portfolio box is much bigger as well. We need to capitalize on that, but if we see something that comes along the line, we certainly will not be shy to go after it if it suits us and if it fits into our strategy.”

The Frutarom deal is the biggest in IFF’s history and, according to Fibig, the biggest-ever in the industry.

“We view the Frutarom deal favorably given above market sales growth (5 percent and 6 percent average normalized growth over the last five and three years, compared to 4 percent and 3 percent at IFF, respectively), derived from its exposure to faster growing local/regional customers, natural ingredients, and to a lesser extent adjacent categories (e.g., enzymes, food protection),” wrote Stifel analyst Mark Astrachan in a note.” We also believe customer overlap is limited, minimizing sales dis-synergies, while also creating an opportunity for sales synergies from more fully integrated product solutions and cross-selling. That said, we view integration risk as above average given Frutarom has acquired approximately 70 companies in recent years, with a business model in part predicated on additional M&A.”

The company unveiled the acquisition at the same time as its first-quarter earnings.

Sales were up 12 percent from the year-ago period, to $931 million. Earnings per share were $1.63 a diluted share, up from $1.45, and net income was $129.4 million, up 12 percent year-over-year. The Flavors segment brought in $449 million in sales for the quarter, while fragrances posted $481.9 million in sales.

Frutarom is expecting more than $1.6 billion in sales for 2018, and has a goal of reaching $2.25 billion in annual sales by 2020. The business operates in the global flavors and fine ingredients for the food, fragrances, pharmaceutical, neutra-ceutical and cosmetics industries. More than 75 percent of the company’s sales come from natural products. The business has production and development centers on six continents, produces more than 70,000 different products and has more than 30,000 customers in 150 countries.

Under the terms of the transaction, Frutarom shareholders will receive $71.19 a share in cash, and 0.249 per share in IFF stock.

The deal values Frutarom at 20.3 times its expected 2018 earnings before interest, taxes, depreciation and amortizaton. IFF will finance the deal through a combination of cash on hand, new debt and $2.2 billion in new equity. The business has secured committed bridge financing from Morgan Stanley Senior Funding Inc. When the deal closes, IFF’s net debt to adjusted EBITDA ratio is expected to be about 3.7 times — the company said it will “prioritize deleveraging” and expects that number to be down to 3 times within 18 to 24 months. The companies expect $145 million in run-rate cost synergies by the third full year after closing, with 25 percent of those achieved after the first full year. The deal is expected to close in six to nine months.

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