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.
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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.)
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