Bayer Abandoning Schiff Thwarts Bets on Bid War: Real M&A

Bayer AG (BAYN)’s concession of defeat in the bidding war for Schiff Nutrition International Inc. (SHF) thwarted traders who were betting that the vitamin industry’s most expensive deal would get even pricier.

Bayer, Germany’s biggest drugmaker, said today that it won’t raise its $34-a-share bid for U.S. vitamin maker Schiff because the price would have been too high. Reckitt Benckiser Group Plc (RB/)’s surprise tender offer last week at $42 a share trumped Bayer by 24 percent and valued Schiff at 4.3 times sales, the highest multiple on record for a vitamin and nutrition products deal larger than $100 million, according to data compiled by Bloomberg.

Today’s announcement wiped out some returns for traders who had pushed Schiff’s shares as much as 6 percent above Reckitt Benckiser’s offer price in anticipation of an escalating bidding war for the seller of Airborne cold-prevention remedies and MegaRed krill oil. While Bayer was looking to bolster its North American consumer health products to more than the current 6 percent of sales, Reckitt Benckiser Chief Executive Officer Rakesh Kapoor was willing to pay up for a company with a U.S. foothold in what he says is a $30 billion global market for vitamins and supplements.

“It shows he has got a bit of chutzpah; he’s going to be decisive when he needs to be,” Martin Deboo, an analyst at Investec Plc, said in a phone interview from London, referring to Kapoor. “This is a sensible deal even though the multiple is quite high. Reckitt has proved to be reliable in deliveries of synergies even against demanding acquisition multiples.”

Dropping Out

On Oct. 30, Leverkusen, Germany-based Bayer said it had agreed to buy Salt Lake City-based Schiff for $34 a share, or about $1.1 billion including net debt, according to data compiled by Bloomberg. Reckitt Benckiser trumped Bayer’s bid with an unsolicited tender offer last week at $42 a share, or about $1.4 billion, the data show.

Bayer said today in a filing with the U.S. Securities and Exchange Commission that while a combination would still be logical, a competitive bidding process “would result in a price outside Bayer’s set financial criteria.” Bayer declined to comment beyond the filing, a spokesman said.

Bayer still thinks Schiff is “a good business, but they will not pay more than they think it is worth,” Alistair Campbell, a London-based analyst at Berenberg Bank, wrote in an e-mail. “They have stressed that they are disciplined on M&A and always have a clear idea about what the valuation means in terms of making sure there’s some value created for Bayer shareholders. I think raising the offer for Schiff simply crosses that line, so this is Bayer M&A discipline in action.”

Traders’ Bets

Becky Herrick, a spokeswoman for Schiff who works at LHA, didn’t immediately respond to a phone or e-mail messages seeking comment on Bayer’s decision and whether the company would agree to a deal with Reckitt or solicit other buyers.

“We cannot comment on Bayer’s decision,” a representative for Reckitt Benckiser said in an e-mailed statement. “We stand by our offer and look forward to reaching an agreement based on due diligence.”

Schiff shares had closed above $42 on each of the last two days and reached as high as $44.50 as traders who profit from mergers and acquisitions wagered that Bayer would match or exceed Reckitt Benckiser’s bid. Peter Lobravico, New York-based vice president of merger arbitrage trading and sales at Wall Street Access Corp., was among those who had projected higher bids.

‘Knockout Bid’

“Reckitt delivered a knockout bid,” he said today in a phone interview. Bayer “didn’t want to get involved in the bidding war. They thought maybe the end game was going to wind up at a price even much higher than the current Reckitt offer.”

Lobravico said traders only lost money if they bought the stock after the Reckitt Benckiser offer was disclosed.

Today, Schiff shares fell 5.2 percent to $41.86.

Reckitt Benckiser’s bid values Schiff’s equity at the highest multiple to its trailing 12-month sales of any similar- sized deal in the vitamin and nutrition industry, data compiled by Bloomberg show.

Still, Schiff’s sales are projected to rise 45 percent in the year ending in May from the prior year, according to analysts’ estimates compiled by Bloomberg. Based on estimated fiscal 2013 sales of $376.5 million, Reckitt Benckiser is paying about 3.3 times revenue. The industry median is about 2.7.

“The deal is not cheap, but if you consider the potential for top line and margin improvement as well as some synergy benefits, multiples do not seem crazy,” Pinar Ergun, a London- based analyst at Sanford C. Bernstein & Co., said in a phone interview.

Heartburn Relief

In announcing its bid on Nov. 15 after the close of U.S. trading, Slough, England-based Reckitt Benckiser said it expects “significant synergies” from a takeover of Schiff.

Reckitt Benckiser, the maker of Strepsils cold remedies and Gaviscon heartburn relief, and Schiff have products that are already sold by some of the same retailers, such as Wal-Mart Stores Inc. and Costco Wholesale Corp. (COST), and there’s an opportunity to sell Schiff’s brands through other distribution channels, Kapoor said on a conference call last week.

“Reckitt’s looking at it and saying this is a $30 billion pie of which Schiff has such a small sliver,” Sachin Shah, a Jersey City, New Jersey-based special situations and merger arbitrage strategist, said in a phone interview. “They’re willing to pay above Bayer because they see the opportunity. It’s a little unfortunate that Bayer is bowing out, but that was the risk.”

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Brooke Sutherland in New York at bsutherland7@bloomberg.net; Sarah Shannon in London at sshannon4@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net

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