NBTY Wholesale Business Would Reach $700 Mil. Annually With Rexall

NBTY's acquisition of Rexall Sundown would boost the Bohemia, N.Y.-based supplement firm's wholesale business into the $700 mil. sales range.

Rexall is about $100 mil. larger than NBTY's wholesale operations in terms of annual sales. The marketer of Sundown supplements, Osteo-Bi-Flex supplements and CarbSolutions nutritionals recorded 2002 sales of $455 mil., according to Numico.

NBTY is assuming some decrease in Rexall revenues in 2003, predicting sales in the $400 mil.-$410 mil. range. The company's sales declined 22% in 2002 and reported earnings before interest, taxes and appreciation were down 74% to about $25 mil.

NBTY reported net sales of more than $290 mil. in fiscal 2002 (ended Sept. 30) in its wholesale division. The unit includes Nature's Bounty and other brands. The acquisition will lift NBTY's overall sales, which totaled $964 mil. in cash in FY 2002, to approximately $1.4 bil.

NBTY announced June 10 it reached an agreement with Royal Numico to purchase Rexall Sundown for $250 mil. The transaction is expected to close in July.

Investors initially showed enthusiasm about the acquisition by boosting NBTY's stock price almost 18% to a June 10 close of 20.42.

However, the issue slipped back below 20 the next day following announcements by Standard & Poor that it may cut NBTY's corporate credit rating, and Jefferies & Co. that it had downgraded NBTY from buy to hold.

Concern with integration risks due to Rexall's size as well as margin compression resulting from Rexall's comparatively lower margins also prompted Moody's to state June 12 it may cut NBTY's credit rating. The company currently is carrying $175 mil. in debt.

Commenting on the purchase, NBTY Chairman & CEO Scott Rudolph said "Rexall will play a key role in the further growth of our wholesale business by allowing NBTY to offer a greater number and variety of products, expand our manufacturing operations and enhance delivery and service to our growing customer base."

Rudolph acknowledged NBTY's margins ultimately would be squeezed by incorporating Rexall. However, he pointed out manufacturing synergies resulting from the combination are expected ultimately to improve Rexall's margins. He noted the Boca Raton, Fla.-based company manufactures only about 50% of the products it sells, while NBTY produces 90% of its marketed products.

Following the acquisition, NBTY expects the ratio of Rexall products manufactured in-house will "go up substantially from 50%." NBTY currently contract manufactures soft gels and powdered products for Rexall.

NBTY also plans to spur Rexall sales through aggressive new product activity building on the firm's already established lines.

Rexall has "not really developed that many new products in any of the brands. Whether it is Met-Rx or Sundown, all their brands need new product development," NBTY President & Chief Financial Officer Harvey Kamil said.

"I would think that in the next 12 months there is going to be a tremendous amount of new products coming to these different brands," the exec continued.

Kamil additionally said the acquisition would facilitate the expansion of NBTY distribution to retailers such as Publix and Dollar Store, where Rexall has made inroads.

The exec said that NBTY expects to announce details of its Rexall integration plan - including possible management changes and product line rationalization due to overlap or low sales - during the firm's Q3 conference call in July.

Rexall decribes its Sundown collection as the leading broadline brand of vitamins, minerals and herbals in mass outlets.

Rexall markets a total of approximately 600 products overall, according to the firm's Web site. NBTY sells more than 1,100 products in various channels of distribution including the mass market, its own health food stores and direct-to-consumer.

In terms of its top management, Rexall CEO Ralph Denisco has been in his position for months, succeeding longtime Rexall exec Damon DeSantis in December 2001 (¹ (Also see "Rexall CEO Denisco Brings Consumer Goods Experience From Nestle" - Pink Sheet, 10 Dec, 2001.), p. 15). The company also recently announced the appointment of Steven Brenia as senior VP-marketing.

The $250 mil. price tag for Rexall is a far cry from the $1.8 bil. Royal Numico paid for the business in 2000. The combination of plummeting supplement sales and divestitures of businesses including the Rexall Showcase direct-sales unit has reduced sales to nearly half their level of $820 mil. three years ago.

Rexall has 290 employees and four distribution, packaging and/or manufacturing facilities in Florida and distribution facilities in Sparks, Nevada and Harrisonburg, Pennsylvania, according to the firm.

Rudolph downplayed the possibility of antitrust issues arising to stall the acquisition, pointing out in the $18 bil. dietary supplement industry, the combined entity would "still make up an insignificant percentage."

Announcing the pending sale, Numico Chairman & CEO Jan Bennink said with the transaction "we divest a significant non-core asset" and can "focus on [our] core cash generators: baby food and clinical nutrition, and to secure the turnaround at GNC."

Numico also announced a refinancing of its debt via a $1.25 bil. bank facility and $300 mil. convertible bond offering. With the refinancing, the firm said "we have successfully resolved the key financial management issue which has faced our company" and can proceed with a focus on core categories.

Numico recently accepted "informal" bids for GNC and has given the business until next spring to improve its performance.

Former GNC CEO Bill Watts, who recently stepped down from Numico's supervisory board, has expressed interest in acquiring the health food store business in conjunction with a U.S. venture capital firm, according to Numico.

NBTY recently picked up about 55 GNC stores in operating in England and Germany but its unclear whether the firm is a likely candidate for buying the whole GNC operation.

NBTY acquired the overseas stores as part of its purchase of Health & Diet Group Ltd from Numico in March (² (Also see "GNC Sales Fall 12% In Q4; Numico Considering “All Options” For Chain" - Pink Sheet, 10 Mar, 2003.), p. 13).