Even the wildest rollercoaster rides come to an end, and nutritional supplement maker NBTY's (NYSE:NTY) ride is at an end. Before the open Thursday, NTY announced that the company had accepted a $3.5 billion all-cash buyout offer from private equity giant Carlyle Group.

If you have never paid much attention to NBTY before, pull up a long term chart and count the number of 50% retracements over the past 20 years - I think I counted seven. I have followed this stock for at least 15 of those years, and owned it once along the way. Throughout that run, I was always surprised that the company could never carve out a steady and stable growth trajectory.

IN PICTURES: 20 Tools For Building Up Your Portfolio

At first blush, you might think it should be easy to form a steady busy when the idea is that your customers take your products regularly (often more than once per day). Unfortunately, that is just not the nature of the business. The supplements industry is a fad-driven business and it always has been. Instead of eating a varied, healthy diet and exercising regularly, folks want the magic bullet shortcut. So, you see certain supplements come out of nowhere (goji berries anybody?), filter into the mass market, and disappear once rigorous clinical testing disproves any long-term benefit. That has translated into boom-bust product cycles for the supplement industry, and as the largest player NBTY has gone for the ride. (For related reading, see Healthy Nutritional Stocks.)

A Healthy Deal?
With this bid, Carlyle is offering to pay about 8.5-times trailing EBITDA for NBTY. Although that may seem like a small premium relative to recent consumer-oriented take-outs like Bare Escentuals or Chattem, those business did not have nearly the same level of volatility in their financial results. Accordingly, it seems entirely appropriate to me that a more volatile business should trade at a lower multiple when the overall expected market growth rates are similar.

On the other hand, NBTY's rival Perrigo (Nasdaq:PRGO) has also reported rather volatile performance (at least on the free cash flow line) over the last decade, and carries a higher multiple. I think it is reasonable to argue that Perrigo's business is different enough to deserve a different valuation (including OTC and prescription drugs), but there is at least room for debate.

Interestingly, Carlyle seems to have anticipated some rebellion to the multiple they were offering. The buyer is offering NBTY a window of opportunity to solicit a better bid, though I do not know if there is a break-up fee involved should NBTY find a better offer elsewhere. One other interesting item I noticed - Bank of America (NYSE:BAC) is part of the syndicate that has been tapped to provide debt funding for Carlyle, but BAC is also serving as an advisor to NBTY. That seems a little odd to me.

The Bottom Line
Unfortunately for investors, the supplement industry is almost entirely in the hands of large privately-held businesses and very small public companies, so there is really no clear option to play this industry once NBTY goes out.

On a happier note, it looks like private equity is getting back into the game. The Washington Post cited a report suggesting that there was $500 billion laying around in the coffers of private equity shops, and Carlyle apparently had potential competition in this deal from Blackstone Group (NYSE:BX).

Considering the multi-billion dollar deals for IDC and IMS Health earlier this year, and with major banks standing behind this Carlyle bid (Bank of America, Barclays (NYSE:BCS), and Credit Suisse (NYSE:CS)) perhaps the window has opened up again for these kinds of ventures. Though it is unwise to buy a stock hoping it will get a buyout bid, having well-heeled investors back on the hunt for companies to take private can only be good news for valuations. (For more, see The Value Investor's Handbook.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  2. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  3. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  4. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  5. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  10. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!