Schiff Nutrition International Inc. (SHF:US) has traders betting that what’s already the most expensive deal in the vitamin industry is about to get even pricier.
Shares of Schiff ended yesterday 5.1 percent above a $42-a- share bid from Reckitt Benckiser Group Plc (RB/), which last week topped Bayer AG (BAYN)’s $34 offer for the Salt Lake City-based maker of Airborne cold-prevention remedies and other supplements. No other U.S. transaction valued at $1 billion or more is trading that far above its deal price, according to data compiled by Bloomberg, signaling traders who profit from acquisitions anticipate a higher offer.
Investors are betting Bayer will match or exceed the $1.4 billion bid and push Reckitt Benckiser to pay up for a bigger foothold in the $30 billion market for vitamins and supplements, said Tullett Prebon Plc. Schiff would give Bayer more sales in the U.S. and brands such as MegaRed krill oil that complement its over-the-counter medicines, said DZ Bank AG. Johnson & Johnson (JNJ:US) or Pfizer Inc. (PFE:US) may also weigh bids, Wall Street Access Corp. said. Reckitt Benckiser’s offer values Schiff at 4.3 times sales, already the vitamin industry’s most expensive deal larger than $100 million, data compiled by Bloomberg show.
“The market is definitely pricing in a higher bid,” Peter Lobravico, New York-based vice president of merger arbitrage trading and sales at Wall Street Access Corp., said in a telephone interview. “These are both very deep-pocketed companies and this is a small asset in the grand scheme of things. This one is really going to come down to whoever is willing to pay the higher price. The market knows that and that’s why it is trading 5 percent through what is already an extremely large premium.”
Becky Herrick, a spokeswoman for Schiff who works at LHA, didn’t respond to a phone or e-mail message seeking comment.
Christian Hartel, a spokesman for Leverkusen, Germany-based Bayer, declined to comment on Reckitt Benckiser’s counterbid, and declined to comment when asked if Bayer would raise its offer. A representative for Reckitt Benckiser declined to comment on whether it would be prepared to raise the offer if the bidding for Schiff escalated.
In announcing its bid on Nov. 15 after the close of U.S. trading, Reckitt Benckiser said it expects “significant synergies” from a takeover of Schiff. The Slough, England-based company said it’s prepared to sign a merger agreement “substantially similar” to the one Schiff has with Bayer and “looks forward to engaging with Schiff’s board and is confident that they will recognize it as a superior proposal.”
Bayer held meetings to assess the situation and evaluate next steps, three people close to the company who declined to be identified because the deliberations are private said last week. No final decision had been made on whether it would make a counterbid or walk away, the people said then.
Bayer’s Oct. 29 agreement with Schiff allows the U.S. company to accept an unsolicited higher offer within 30 days, provided it pays Bayer a $22 million breakup fee.
Schiff’s shares traded above $42 in the two days since Reckitt Benckiser announced its bid, as merger-arbitrage traders bet that the company would receive an even higher offer.
“Arbs believe there is the potential for a bidding war,” Andrew Rosen, managing director of equity derivatives at United First Partners LLC, an event-driven research firm, said in a phone interview. “This is a sensible strategic bolt-on acquisition for these guys and that tends to encourage a bidding process.”
Yesterday’s trading indicated that investors expected a counterbid of at least $46, Rosen said.
A takeover of Schiff would help Bayer, Germany’s biggest drugmaker, bolster its U.S. sales of treatments that don’t require prescriptions, according to Peter Spengler, a Frankfurt- based analyst at DZ Bank. Sales of consumer health products in North America accounted for just 6.3 percent of the aspirin manufacturer’s 36.5 billion euros ($46.7 billion) of revenue last year, data compiled by Bloomberg show.
“For Bayer, it’s important to increase its footprint in the U.S. in over-the-counter products,” Spengler said in a phone interview. While Bayer ranks as one of the top-three over- the-counter drugmakers worldwide, it’s only among the 10 largest in the U.S., he said.
Schiff’s products, such as MegaRed krill oil that promotes heart health, also complement many of the medicines Bayer makes and it could leverage those brands globally, he said.
Revenue at Schiff, which paid $150 million to buy Airborne Health Inc. in March, may jump 45 percent in the year that ends May 31 to about $377 million, according to analysts’ estimates (SHF:US) compiled by Bloomberg. That’s still just 1 percent of what Reckitt Benckiser Chief Executive Officer Rakesh Kapoor says is a $30 billion global market for vitamins, minerals and supplements.
That was a “game-changer” for investors that were ready to sell to Bayer for $34 a share, said Sachin Shah, a Jersey City, New Jersey-based special situations and merger arbitrage strategist at Tullett Prebon.
“Nobody knew the market opportunity was that great until Reckitt’s CEO pointed it out,” Shah said in a phone interview. “Reckitt’s looking at it and saying this is a $30 billion pie of which Schiff has such a small sliver. They’re willing to pay above Bayer because they see the opportunity.”
Reckitt Benckiser, the maker of Strepsils cold remedies and Gaviscon heartburn relief, and Schiff have products that are already sold by some of the same retailers, such as Wal-Mart Stores Inc. and Costco Wholesale Corp. (COST:US), and there’s an opportunity to sell Schiff’s brands through other distribution channels, Kapoor said on a conference call with analysts the next day.
An acquisition of Schiff would propel Reckitt Benckiser to the U.S. leader in vitamins and supplements and help shield it from other seasonal businesses, according to Deborah Aitken, a London-based analyst for Bloomberg Industries.
Investors are anticipating that Bayer will at least match the $42 a share that Reckitt Benckiser is willing to pay and that the bidding won’t stop there, Shah said.
“Reckitt’s not messing around,” he said. “Reckitt’s CEO has given himself room to bid even higher if Bayer comes back in. The market is saying that this situation is going to continue and I would probably agree.”
Other companies, including J&J, the world’s biggest maker of health-care products, or Pfizer, the biggest drug maker, could seek to compete in the bidding for Schiff, said Lobravico of Wall Street Access.
Food manufacturers with nutrition lines may also be lured to the company, whose products include Tiger’s Milk energy bars, he said.
Schiff “kind of crosses the line between health care and the food industry,” Lobravico said. “There probably is a list of five to 10 other companies with deep pockets that could step in here as well.”
Al Wasilewski, a spokesman for New Brunswick, New Jersey- based J&J, declined to comment on whether the company would be interested in bidding for Schiff.
“Pfizer Consumer Healthcare will continue to drive growth through core brands,” Mackay Jimeson, a spokesman for New York- based Pfizer, wrote in an e-mail. He declined to comment on whether the company would be interested in acquiring Schiff.
While Schiff’s product line is attractive and Bayer has the resources to boost its bid, the company tends to be “extremely disciplined in terms of M&A valuation” and may be hesitant to counter Reckitt Benckiser’s offer, according to Alistair Campbell, a London-based analyst at Berenberg Bank.
“To push on more from here, I think probably is a stretch too far for them in terms of valuation,” Campbell said in a phone interview. “Bayer does want to try to grow the health- care side of the business, but I don’t think Schiff was ever an absolute must-have target for them. It’s a good target. But I don’t get the sense that strategically, it’s a crucial thing to have.”
The competing bid from Reckitt Benckiser values Schiff’s equity at 4.3 times sales in the last 12 months, compared with a revenue multiple of 3.5 based on Bayer’s offer, according to data compiled by Bloomberg. Reckitt Benckiser is ascribing the highest valuation to Schiff’s revenue of any deal for a maker of vitamins and nutrition products greater than $100 million, the data show. The industry median is 2.7.
“Reckitt Benckiser was more aggressive in terms of a price they were willing to bid,” Ronald Koehler, a Frankfurt-based analyst at Main First Bank AG, said in a phone interview. “Already that value is kind of stretched” and a bid from Bayer topping that “is definitely something that they would have difficulty explaining to investors.”
There’s still room to boost the price without overpaying, according to Tullett Prebon’s Shah. He estimates that Reckitt Benckiser is valuing Schiff at 3.5 times estimated sales for 2013. Increasing that by one “turn” to 4.5 times sales would imply $55 a share, which is likely the ceiling, Shah said.
“After that it becomes just ego-oriented and the chances of value destruction for the acquirer’s shareholders are probably high,” he said. Still, “I am betting that it doesn’t take very much for it to get to the $50 level and get to that one turn extra of payment.”
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