November 16, 2012 10:06 pm

Reckitt / Schiff – the value of vitamins

An attempt to see off concerns about prospects

Vitamin sceptics see dietary supplements as a waste of time and money. Merger and acquisition sceptics believe much the same thing when it comes to deals. Can Reckitt Benckiser prove them both wrong at once? The consumer goods company has offered $42 per share for Schiff, valuing the US-based purveyor of nutritional supplements at $1.4bn and topping an already agreed $34 per share, $1.2bn offer from Bayer.

Reckitt hopes that it can start to see off concerns about its prospects by getting into a growth market – according to Euromonitor, the dietary supplements market has been growing at 8 per cent a year since 2006, although the rate is slowing. Reckitt’s sales are up 4 per cent so far this year; they rose 10 per cent in the same period in 2008. Schiff’s $385m of revenues are small against Reckitt’s $10bn, but the latter sees health as a target market.

Reckitt’s offer is an 82 per cent premium to Schiff’s undisturbed share price before Bayer’s offer in late October, and values it, including debt, at 18 times forecast earnings before interest, tax depreciation and amortisation. There will be some cost savings, but they alone do not justify the premium. Assume that Reckitt can squeeze out $39m of costs, equivalent to 10 per cent of Schiff’s turnover. When taxed and capitalised, those savings are worth $270m. Yet Reckitt has offered a premium of more than $550m to the undisturbed market capitalisation.

Reckitt will also hope to improve sales by pushing Schiff’s products through its own sales channels and applying its consumer goods expertise to a sector dominated by pharma companies. Such “revenue synergies” can be elusive, however.

Reckitt’s offer is not wildly out of kilter with recent consumer goods deals in attractive markets; Bayer might struggle to justify topping it. But Reckitt has a tough job to win over both deal and vitamin doubters.

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