Schiff Creates A Bidding War

I recently wrote an article for Investopedia highlighting Bayer's (OTC:BAYRY) acquisition of Schiff Nutrition International (NYSE:SHF) for $1.1 billion or $34 per share. It was a transaction that favored everybody involved; winners all-around. Except that Schiff had the opportunity to welcome offers in writing from other interested parties until November 28. If Schiff cancels its agreement with Bayer it must pay $22 million to the German company, a relatively modest amount considering the total dollar value of the deal. I must confess I didn't see a bidding war evolving, but now it appears Reckitt Renckiser's (OTC:RBGPY) $42 per share might not be the end of it. Shareholders who sold on the Bayer news have left some serious cash on the table. Those who held are in for an unexpected bonus. Congrats!

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Why The Interest?
In my article I mentioned that private equity firm TPG acquired 25% of the company from Weider Health and Fitness, Schiff's majority owner, for $48.8 million. A key addition to the board was Bill McGlashan, Jr., a managing partner of TPG's Growth Fund and in a previous life the founder of a dietary supplement company now owned by Nu Skin Enterprises (NYSE:NUS). McGlashan brought the perfect mix of financial and industry experience necessary to find a strategic buyer that could take it to the next level. What I didn't expect after Bayer made its offer was that another big fish would come out of the woodwork. But given the world McGlashan lives in, it wouldn't have taken long for his phone to start ringing. After all, TPG Growth has invested in numerous retail and consumer brands and would have regular contact with companies like Reckitt Benckiser, whose health segment generates 21% of its revenue. Reckitt Benckiser has made three large multi-billion dollar acquisitions in the health sector since 2006; this is a relatively minor deal in terms of dollars, but critically important to the company because it gets them into the ultra-competitive $30 billion vitamin and supplement market. It's a no-brainer.

SEE: Analyzing An Acquisition Announcement

As of Nov. 16 we have an offer on the table for $42 per share. That's 24% higher than the $34 bid from Bayer. Schiff's deadline of Nov. 28 means Bayer has very little tme to make a counter offer. According to Bloomberg, Bayer officials are meeting to decide its next move. Reckitt Benckiser is offering to pay 28 times EBITDA when 18 times has been the norm for similar deals in recent years. Sanford C. Bernstein analyst Andrew Wood told his clients Nov. 16 that he believes the chances are fair-to-good that Bayer will counter and that Johnson & Johnson (NYSE:JNJ) could enter the fray. If that happens, there's a slight chance we could see the share price jump to $50 or more. Based on EBITDA earnings of $50 million, 29 times EBITDA translates into $43.50 per share, 30 times EBITDA equals $45 per share, and $1.50 per share above that. To get to $50, a prospective buyer would have to pay 33.3 times EBITDA. My guess is that the highest offer would come in at $48 per share or a multiple of 32 times. I just don't see $50, but definitely hold on to your shares until Nov. 28. This is going to be exciting.

The Bottom Line
MarketWatch published an article Sept. 20 written by buy-side equity trader Andy Hicks. In it Hicks discusses the concept of increasing cash yield with merger arbitrage. Generally Hicks looks for deals that are all-cash, represent less than 25% of the acquiring company and will close within six months. Schiff meets all three of them. Hicks was referring, however, to arbitrage situations where the current stock price is lower than the purchase price. In this situation, Schiff's stock closed trading Nov. 16 at $43.76, $1.76 per share above Reckitt Benckiser's offer. Before you should play this game, Schiff's stock has to drop below $42.

SEE: Trade Takeover Stocks With Merger Arbitrage

At this point the odds are good that someone adds another couple of dollars to the pot, but beyond that it gets a little dicier. I wouldn't buy at this point, but that doesn't mean you shouldn't. Either way, those still holding really shouldn't care what happens. They're already sitting on an $8 windfall.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.