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Summary

  • Combination of two like minded companies creates huge OTC giant with leading position in feminine care.
  • Acquisition gives Prestige Brands its first $100 million brand.
  • Deal will improve gross margin by 300 basis points.
  • International sales continue to increase with acquisition of Hydralyte.

Shares of OTC consumer brand company Prestige Brands Holdings (NYSE:PBH) saw an 18% spike on Friday thanks to a very smart acquisition. The acquisition of Insight Pharmaceuticals brings the company closer to its goal of annual revenue of $1 billion and will immediately affect earnings per share and free cash flow. Despite Friday's move, I see new highs in Prestige's future.

Prestige Brands has announced it is acquiring Insight Pharmaceuticals for $750 million. After tax benefits of $100 million, the deal will come with a net price tag of $650 million. Investors in Insight include Swander Pace Capital and Ontario Teachers' Pension Plan.

Insight Pharmaceuticals is extremely similar to Prestige Brands with its OTC products from larger companies where they were unloved. Here are the categories Insight lists on its site for its products:

· Allergy, Cold, and Flu

· Baby Care

· Diabetic

· Digestives/Laxatives

· Dietary Supplement

· Ear

· Feminine Hygiene

· First Aid

· Pain Relievers

· Pregnancy Testing

· Therapeutic Skin Care

Insight's CEO once said the strength of his company is the products are "need driven" and largely recession proof. He cited lice and motion sickness OTC products and had this to say about the ept pregnancy test brand, "If somebody needs to take a home pregnancy test, she is going to get a home pregnancy test."

Two major acquisitions have gotten Insight to the point it was at today. It acquired ept, which doubled its sales to $100 million. The acquisition of Monistat took it over the $200 million mark. The CEO said, "This acquisition (Monistat), along with ept, has increased our revenues by nearly four times in the last 12 weeks." Monistat is really the key to this acquisition, as it will become the largest Prestige brand and the first with annual sales of $100 million. Monistat is the number one doctor and pharmacist recommended and number one choice of women and has leading market share of over 50%.

ept is in a highly competitive market against First Response, from Church & Dwight (NYSE:CHD) and Clearblue from Procter & Gamble (NYSE:PG). ept remains the number one recommended pregnancy test by pharmacists according to Friday's presentation.

Prestige Brands also acquired Hydralyte in a deal earlier this week that will dramatically increase its international sales. Hydralyte has a leading market share of 82% in the OTC oral rehydration market in Australia and New Zealand. The product is approved OTC for newborn, infants, children, adults, and elderly. Hydralyte is used for rehydration from travel, alcohol, work, sports, or hot weather.

The two acquisitions are expected to take Prestige Brands annual sales to $800 million. EBITDA is expected to hit $300 million in fiscal 2015. Both deals take the company closer to its goal of becoming a billion dollar OTC products company. The addition of Hydralyte will also take sales in Australia to 50 million (Australian Dollars), doubling the current level. This also takes Prestige closer to its goal of $100 million in sales from the Australia/Asia region.

International sales continues to be a bright spot and a source of opportunity. Back in 2011, Prestige saw 10% of total sales come from international markets. That number will move up to 15% in 2014, but should be able to move higher if Prestige can take some of its brands or newly acquired brands to new markets or make another international focused acquisition.

Insight was heavily weighted towards feminine care, where 70% of its sales came from. The United States also made up 95% of the company's sales, which could be an opportunity going forward for Prestige Brands.

Here is how Prestige Brands sees its product lineup shaping up after the deal in United States sales:

· Feminine Care: $130 million

· Cough/Cold: $120 million

· Analgesics: $120 million

· G.I.: $100 million

· Eye/Ear: $90 million

This is certainly not the last acquisition for Prestige Brands and likely won't be the last. The company continues to buy unloved brands that large pharmaceutical and consumer product companies don't want anymore. Back in 2011, Prestige acquired 17 brands from GlaxoSmithKline (NYSE:GSK) in a $660 million deal. That deal added $500 million in annual revenue from brands like Beano, Gaviscon, and Goody's. The acquisition was also the reason why Prestige turned down being an acquisition itself.

For those unfamiliar, Prestige Brands was actually the subject of an acquisition offer from Mexican pharmaceutical company Genomma Lab International. At that time, Genomma wanted to pay $834 million for Prestige. Prestige rejected as it was already in the process of realizing value from several acquisitions and believed the deal undervalued the company. Now two years later, shares are double what they were at the time of the proposal.

Back in February, Prestige Brands reported a 9% decline in third quarter revenue to $146.2 million. Over the first nine months of the year, revenue is down 2.5%. Adjusted earnings per share fell in the third quarter ($0.30), but remain up over the last nine months ($1.17).

The acquisition will increase net sales by 33%. More importantly, gross margin is expected to improve by 300 basis points to 60%. Earnings per share are expected to hit $1.90 to $2.00 in the first fiscal year from the latest acquisitions.

A source of concern for investors looking at Prestige Brands is its high debt. Before Friday's deal, the company had total debt of over $900 million. The acquisition will likely take that number to $1.5 billion. While that number jumps out as startling for a company with a market capitalization of $1.7 billion, Prestige has actually improved its debt ratio and covered interest ratio from Friday's deal. The improved free cash flow and gross margins should also help to pay back the debt over time.

Shares of Prestige Brands have traded between $24.94 and $36.69 in the last fifty two weeks. Friday's high of $32.70 brought shares close to new highs, but they still trade below the $35 level hit in August and December of 2013. With new categories and "need driven" products, Prestige Brands continues to be a winner in the OTC category. Consider adding this specialty company to your portfolio.

Source: Prestige Brands Looks Like Good Investment After Acquisition Of Insight Pharmaceuticals