Schiff Nutrition International - Bayer Offers Compelling Premium For Shares

Nov. 5.12 | About: Reckitt Benckiser (RBGPF)

Shares of Schiff Nutrition International (SHF) rose over 45% over the past week. The nutritional supplement company announced to be taken over by Bayer Healthcare in a $1.2 billion deal.

The Deal

Schiff Nutrition International announced on Tuesday that it will be acquired by Bayer Healthcare. Schiff's leading vitamins and nutritional supplements include core brands as MegaRed, Move Free and Airborne. Bayer will pay $34 in cash per share, for a total deal value of almost $1.2 billion.

Bayer's extensive marketing, sales and distribution expertise allows Bayer to further develop the strong brands acquired. Schiff's new technology platforms increases Bayer's innovation potential of other brands of Bayer across the globe.

CEO Marijn Dekkers of Bayer commented on the deal, "Bayer is committed to augment its organic growth with strategic bolt-on acquisitions. This transaction represents an excellent strategic fit for our HealthCare business. The Schiff businesses significantly enhances our presence and position in the United States, which accounts for more over-the-counter and nutritional products sales than any other country in the world."

For its fiscal year ending in May 2012, Schiff Nutrition generated sales of approximately $259 million. The company reported a net profit of $13.7 million for the year. The company guided for 43-46% sales growth for its current fiscal year. Growth is driven by the contribution from the acquisition of Airborne, announced in March of this year.

Revenue growth for the current year could come in around $375 million. The deal vales the equity of Schiff around $1.0 billion, Bayer will furthermore assume $134 million in long term debt outstanding.

The deal values firm at roughly 3.2 times annual revenues based on the reported $1.2 billion enterprise value. The deal values the firm at 88 times past year's fiscal earnings. Schiff guided for operating earnings of $50 million in its fiscal 2013, valuing the firm at 24 times operating income.

Schiff employs 400 people in its headquarters in Salt Lake City. When acquired, Schiff will be part of Bayer which employs approximately 112,000 people for its fiscal 2011. The healthcare division, in which Schiff will be placed, reported annual sales of Euro 17.2 billion for that year.

Completion of the deal is subject to customary closing conditions and anti-trust approval. The deal is expected to be closed before the end of 2012.


Schiff Nutrition ended its first quarter of its fiscal 2013 with $20.3 million in cash, equivalents and securities available for sale. The company operates with $132.3 million in long term debt, for a net debt position of $112 million.

The company guided for 43 to 46% growth in revenues for its fiscal 2013, resulting in $375 million in revenues at the midpoint of the range. Operating margins are expected to come in between 12.5 and 14%, for operating income of roughly $50 million.

Growth of the business will be driven by the $150 million acquisition of Airborne, the provider of immune support products. Schiff announced the acquisition of Airborne in March of this year. Airborne reported annual revenues of approximately $70 million over its past year.

Schiff currently does not pay a dividend.

Investment Thesis

Year to date, shareholders of Schiff Nutrition International have had a great run. Shares rose from levels around $10 in January to levels around $34 at the moment. Long term holders have seen even better returns as shares traded as low as $4 in 2009.

Between its fiscal 2009 and fiscal 2013, Schiff grew its annual revenues from $191 million to an estimated $375 million in the coming year. Net income rose from $10 million to an expected $25 million this year.

The deal is an excellent addition, specially for shareholders in Schiff Nutrition International. Shareholders have seen their holdings more than triple in 2012 alone. The take-out valuation is very rich and shareholders should be glad to make use of this exit opportunity.

For global firms like Bayer these are little bolt-on acquisitions which are dilutive in the short run but offer the potential for long term growth. In general these small acquisitions are too small to induce any meaningful reaction from Bayer's shareholders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.