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Prestige Brand Sees The Ups And Downs Of Buyout Talk

Posted
9/10/2012 2:19:00 PM
By: Investor's Business Daily
Referenced Stocks:GSK;JNJ;NVS;PBH;PFE

Officials atPrestige Brands ( PBH ) could probably write an opera about how buyout talk affects a company's stock price.

Prestige sells brand-name, over-the-counter health care, household cleaning and personal care products. Its lineup includes Clear Eyes eye care products, Luden's cough drops, PediaCare children's medicines and Comet household cleansers.

Over the past several months, the company's stock price has bounced all over the place thanks to M&A chatter.

Prestige's shares rose 20% in late December when the company announced a $660 million buyout of 17 different brands from British drugmakerGlaxoSmithKline ( GSK ).

The stock got an even bigger lift Feb. 21 when Genomma Lab, a Mexican pharmaceutical products firm, said it would buy Prestige for $834 million in cash.

That announcement sent Prestige shares up 21% to a 6-1/2-year closing high of 16.41. The stock price kept climbing over the next few months before tanking May 3, when Genomma said it would drop its buyout bid after Prestige rejected the offer.

Cash Offer

Genomma's cash offer equaled $16.60 a share, a premium of 23% over Prestige's closing price before the offer was made. In March, however, Prestige said the deal was "inadequate."

Prestige's stock price fell 15% to 13.93 the day Genomma pulled its offer. That was roughly the same price it sold at before the offer was even made.

Since then, however, Prestige shares have crept back up to near 16 as Wall Street's attention has shifted back to the company's solid financial performance.

Prestige has averaged 18% annual sales growth and 16% annual earnings growth the past two years as it rebounded from lackluster results in fiscal 2009 and 2010.

The company turned in its best performance in years during its fiscal first quarter, which ended in June. Prestige grew year-over-year earnings 52% during the quarter, while revenue showed a 54% increase.

"The fiscal 1Q results reflect continued progress on a number of fronts, including growing its core OTC business, integrating the recently acquired Glaxo brands and de-leveraging its balance sheet," Oppenheimer analyst Joseph Altobello noted in a report.

Prestige completed the last two of its Glaxo purchases in April when it finalized the deals for Debrox ear wax remover and Gly-Oxide oral rinse.

Other brands that came aboard in the Glaxo deal include Clear Eyes, Luden's, Chloraseptic sore throat treatments, Efferdent denture care products, BC & Goody's headache powders and Fiber Choice and Beano digestive aids.

The $660 million purchase price was a lot for a company that produced $441 million in sales last fiscal year. But company watchers say Prestige is doing a good job shoring up its balance sheet.

"The company continues to work on reducing its debt level and expects to exit fiscal 2013 with free cash flow of $110 million," Zacks Equity Research noted in a recent report.

Prestige sells its products mainly to mass merchandisers, drugstores, supermarkets and dollar and club stores. Most of its business is in the U.S. and Canada, though it also sells to other international markets.

The company competes against a number of much larger firms, includingJohnson & Johnson ( JNJ ),Pfizer ( PFE ),Novartis ( NVS ) andProcter & Gamble (PG).

Prestige used a combination of buyouts and organic growth initiatives to bulk up and build larger economies of scale. Much of its growth strategy is focused on bulking up its lineup of over-the-counter products, watchers say.

Last fiscal year, OTC goods made up 78% of the company's overall sales. In its note, Zacks said Prestige's aim "is to generate 85% of its revenues from OTC products by the end of fiscal 2013."

Sales Growth

Prestige is well on its way to reaching that goal. Fiscal Q1 revenue for the OTC health care segment grew 77% from the prior year to $126.2 million, or 86% of the total. Much of the gain was driven by products from the Glaxo buyout.

"The company's No. 1 priority in the first quarter was the integration of the 17 acquired brands into our business and organization," Chief Executive Matthew Mannelly said in a statement. "We are particularly pleased with our strong financial results during this important transition period."

The OTC gains helped offset a 13.6% decline in sales of household cleaning products, which were hurt by promotional programs as well as a challenging retail environment.

Earnings for the quarter rose to 35 cents a share from 23 cents a year earlier, topping estimates by 6 cents. Gross margin came in at 56.9% vs. 52.3% the previous year. The improvement was mainly because of higher OTC sales.

"Our strategic emphasis on OTC continues to enhance our financial profile," CEO Mannelly said. "In addition, our consistent free cash flow enables us to rapidly deliver. We are pleased with our progress and look forward to realizing the full effect of the Glaxo acquisition moving forward."

Analysts polled by Thomson Reuters expect full-year earnings to rise 35% to $1.34 a share. They see fiscal 2014 profit growing 11% to $1.49 a share.