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Church & Dwight Co Inc. (NYSE:CHD) announced on Monday that it will acquire Avid Health in a deal valuing the firm at $650 million. In a reaction to the announcement, shares of Church & Dwight rose by more than 5.1% in Tuesday's trading session.

The Deal

Church & Dwight announced that it will acquire Avid Health in an all cash transaction, valuing the firm at $650 million. Avid Health is a leader in gummy-form vitamins and supplements, known from its brands VITAFUSION and L'IL CRITTERS.

CEO and Chairman James Cragie commented on the deal:

"The acquisition of Avid's gummy vitamins business represents a great addition to our existing portfolio and brings to our Company a new growth platform in one of the fastest-growing segments of the attractive vitamin / mineral / supplement category."

For its year ending on the 30th of June, 2012, Avid generated annual sales of $230 million. EBITDA came in at $58 million. Church & Dwight expects to leverage its distribution network, operating discipline and support function to achieve cost savings of approximately $15 million in 2014. The acquisition values Avid at 2.8 times annual revenues and 11.2 times annual EBITDA.

The acquisition is expected to finance the deal in a combination of cash and newly issued debt. The deal is expected to dilute 2012's earnings per share by $0.02. The deal is expected to be accretive to 2013's earnings, even when accounting for transaction costs and inventory step-up charges.

The transaction is subject to regulatory approval and is expected to close in the fourth quarter.

Outlook

For the full year of its 2012, Church & Dwight expects diluted earnings per share of $2.41-$2.43, excluding the $0.02 dilutive effect of the Avid acquisition.

For 2013, earnings per share are expected to come in between $2.73 and $2.78, up 13%-15% on the year. Growth is driven by existing businesses and the accretion from the acquisition.

After 2013, the company remains committed to delivering long-term shareholder return targets of 10%-12% per annum.

Valuation

Church & Dwight reported its second quarter results on August the 7th. The company operates with $184 million in cash, equivalents and securities. Church & Dwight operates with $282 million in short- and long-term debt, for a net debt position of $98 million.

The company reported a 3.2% increase in revenues to $696.4 million. It net earned $79.3 million, or $0.56 per share. For the first six months of 2012, the company generated revenues of $1.39 billion, on which it net earned $175.1 million, or $1.22 per share.

Shares of Church & Dwight rose over 5% in Tuesday's trading session, valuing the company at $7.8 billion. Based on the full year outlook, the company is valued at roughly 2.9 times annual revenues, and 23 times annual earnings. The valuation compares to a revenue multiple of 1.7 times for competitor Clorox (CLX). Clorox trades at 17 times annual earnings.

Currently, Church & Dwight pays a quarterly dividend of $0.24 per share, for an annual dividend yield of 1.7%.

Investment Thesis

Year to date, shares of Church & Dwight trade with gains of 22%. Shares rose steadily from a level of $45 in the beginning of this year, to peak at $59 in July.

Over the past five years, shares of Church & Dwight have traded with gains of 150%. Revenues rose from $2.4 billion in 2008, towards $2.8 billion for the full year of 2012. Net income rose from $1.39 per share, towards $2.42 per share for the full year of 2012. At the same time, dividends rose from $0.17 to $0.68 per share.

The acquisition of Avid Health will increase the leverage levels of Church & Dwight, although they will still be acceptable. Over the past years, the company has already significantly fortified its balance sheet, by reducing outstanding debt.

Church & Dwight made an excellent acquisition, which in the short term could boost the stock price to new all-time highs. Despite the premium brands, and stable growing business, I remain on the sidelines. Shares have already made a nice run-up in 2012, and over the past few years. This propelled valuation multiples to very high levels.

Source: Church & Dwight: Acquisition Of Avid Health Could Propel Shares To New Highs