The big fish swallowed the little fish November 2 as Bayer (OTC:BAYRY) announced it was acquiring Utah-based Schiff Nutrition International (NYSE:SHF), a growing vitamin and nutritional supplement business, for $1.1 billion. The deal is a good one for both companies as well as their respective shareholders. I'll look at what each gains from the transaction.
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What Bayer Gets?
Schiff is a leading player in the $28.7 billion nutritional supplement market in the United States, which is growing 7% annually. Focusing on four key conditions: cardiovascular health, digestive health, immune support and joint care; its MegaRed, Digestive Advantage, Schiff, Tiger's Milk, Airborne and Move Free brands generated $272 million in revenues in the 12 months ended February 29 while its private label business added another $44 million for a total of $316 million. In September, Schiff announced solid first quarter results causing it to raise its 2013 full-year revenue guidance. Management now expects revenues to grow by at least 43% to $370 million with an operating profit of $54 million, 112% higher than in fiscal 2012. Approximately three quarters of its revenue growth in fiscal 2013 will come from its March 30 acquisition of Airborne Inc. for $150 million. Paying approximately two times sales, Schiff acquires a popular brand of chewable tablets that provides users with 14 vitamins, minerals and herbs. Bayer shareholders should be aware that Airborne agreed in March 2008 to pay $23.3 million to settle a lawsuit over its claim that its product cured colds. Since then, all marketing has focused on immune support rather than cures of any kind. It's water under the bridge but worth knowing just the same.
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What Schiff Gets?
It now has the financial resources of a global healthcare company by becoming part of Bayer's Consumer Care division (Aspirin, Aleve, One A Day), which had 2011 revenue of $4.5 billion, a small fraction of its $47.3 billion overall. Its One A Day vitamins alone generated worldwide revenue of $225 million in 2011, almost identical to Schiff's fiscal 2012 revenue through the end of May. Bayer's cash and marketable securities at the end of 2011 came to $1.6 billion. If Schiff wants to make another acquisition the size of Airborne, it won't have any problems making that happen. Furthermore, pharmaceutical companies like Bayer and Pfizer (NYSE:PFE) are doing everything they can to diversify away from pharmaceuticals into growth areas like nutraceuticals and animal health. It's not easy developing billion-dollar drugs today; as a result, Schiff is an integral part of Bayer's movement to become a more balanced company. As wellness and prevention continue to be the emphasis of medical care in the U.S., companies like Schiff, Usana (NYSE:USNA), GNC Holdings (NYSE:GNC) and other players in the nutritional supplement business will continue to be desirable acquisition targets. But probably the most important aspect of this deal for Schiff is that it gains permanent stability.
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What Shareholders Get?
A little more than two years ago, majority owner Weider Health and Fitness sold 7.49 million of its Class B shares to private equity firm TPG for $48.8 million. Two years later and TPG is looking at a total return of 421%. There had to be some happy faces at their offices when the news came down. Of course, Eric Weider didn't sell those shares because he wanted some cash for his other businesses. No, he did it to add experience to its board including TPG Growth managing partner Bill McGlashan, Jr., who just so happens to have co-founded Pharmanex, a leading dietary supplement company now owned by Nu Skin Enterprises (NYSE:NUS). McGlashan obviously brought connections to the board and that likely helped bring Bayer together with Schiff, so it was money well spent. Besides, when Schiff went public in 1997, Weider Health had $17.26 million invested in the company, which means if you add in the $48.8 million from TPG, Weider will have delivered to itself a 15-year annualized return of 26% and that doesn't include the four special dividends paid between 2007 and 2010. Finally, those who bought the initial public offering at $11 in April 1997 and still hold it today will have to settle for an annualized return of 8.5%, 280 basis points higher than the SPDR S&P 500 (ARCA:SPY).
The Bottom Line
Bayer paid 17.8 times Schiff's estimated 2013 EBITDA. That compares to an average price paid for vitamin companies over the past five years of 16.9 times. Warren Buffett believes it's better to pay a fair price for a good company than a good price for a fair company. I'd say Bayer's done exactly that and there's winner's all around.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.