Reckitt Benckiser launches a counter offer for Schiff -UPDATE

16th Nov 2012 08:00

Slough based consumer goods giant Reckitt Benckiser has launched a 1.4bn-dollar (882m-pound) non-solicited counterbid for US nutrition specialist Schiff Nutrition International, with the tender offer beginning today. At $44 per share that represents 27% more than German conglomerate Bayer's own £693m ($1.1bn) offer announced last month and a 24% premium over the closing price of Schiff's shares last night. Shares of Schiff finished yesterday's session at $33.92 dollars, but at one point rose as high as $44.19 in after-hours trading, which may indicate that some thought another offer from Bayer was still possible. Rakesh Kapoor, Reckitt Benckiser Chief Executive Officer, highlighted that this acquisition would provide a powerful entryway into the large and rapidly growing $30bn global vitamins, minerals and supplements (VMS) market. Similarly, the company believes that the purchase would give it immediate scale in VMS in the USA. While by some accounts Reckitt Benckiser has a good track-record as regards its acquisitions, yesterday's offer price implied paying what at first glance is a rather lofty 5.41 times estimated 2012 sales and 3.74 times analysts' sales forecasts for the year ending in May 2013. However, although the US outfit's revenues are expected to increase sharply in the year ended in May 2013 (to $374.33m from $251.65m), according to the consensus estimates compiled by FactSet Schiff's sales growth rate is expected to slow down in the year afterwards, with revenues seen rising to $415.97m. Nevertheless, the company enjoys very respectable gross margins, of approximately 46%, which are far better than the 37% sector average.Also worth pointing out, according to Bloomberg deals in this area have averaged 17 times earnings before interest, taxes, depreciation and amortisation (EBITDA) over the last 5 years or 3 times sales.In any case, shares of Schiff would now seem to be rather fully valued. Commenting on all of the above, analysts at Credit Suisse had this to say: "Vitamins represents a new market for Reckitt, and one the previous management was reluctant to explore. The deal (if successful) is not large in size (6 months' free cash flow), but as a statement of intention/direction it is rather more significant. It is consistent with the move to Health/Hygiene as detailed in the February investor presentation. "The challenge will be to convince that vitamin brands are as strong as OTC brands (some are clearly commodities like vitamin C, others Reckitt believe aren't.)"Reckitt Benckiser expects to close the tender offer before year end, assuming prompt due diligence, with the looming increase in US taxation on capital gains being a factor to watch.Lastly, the company indicates that it is prepared to sign a merger agreement substantially similar to the one Schiff currently has with Bayer. "Reckitt Benckiser looks forward to engaging with Schiff's Board and is confident that they will recognize it as a superior proposal," it concludes.