Prestige Raises OTC Brand Acquisition Sights
This article was originally published in The Tan Sheet
Executive Summary
CEO Matthew Mannelly says the firm currently could spend $1 billion in acquisitions and could target larger brands than it has acquired so far. “Maybe a $10 million or $15 million brand doesn't move the needle for us as much anymore as it did,” he says.
Prestige Brands Holdings Inc. could spend as much as $1 billion on its next brand acquisition, roughly equal to the firm’s OTC buying spree over the past four years, says CEO Matthew Mannelly.
“Today we could do $1 billion in acquisitions. We have the financial capacity to do that,” Mannelly said on Nov. 19 at the Morgan Stanley Global Consumer & Retail Conference in New York.
And the firm expects its acquisition capacity to continue growing along with its revenue. By the end of Prestige’s current fiscal year in March 2014, “you'll see we're at $1.3 billion, and by next year we're at $2 billion that we could do, which is twice of what we've done in aggregate over the last four years,” he said.
Mannelly, who has headed Prestige Brands since September 2009, pointed out the firm could target larger brands than it has acquired so far. “Because maybe a $10 million or $15 million brand doesn't move the needle for us as much anymore as it did. Maybe now, it's $20 million, $25 million or $50 million or $100 million,” he said.
Prestige Brands President and CEO Matthew Mannelly
Photo courtesy of Prestige Brands Holdings Inc.
“So, we're looking for bigger opportunities, whether it's individual brands or bigger opportunities in terms of portfolios.”
Under Mannelly, Irvington, N.Y.-based Prestige has made a little more than $1 billion in acquisitions in the past four years. The latest acquisition was Australian OTC firm Care, with annual revenue around $18, and a portfolio including the Fess brand of cold/allergy and saline rinse products, Children’s Paedamin antihistamine and decongestant, and Fab Iron supplements (Also see "Prestige Brands Shows International Ambition In Care Pharmaceuticals Buy" - Pink Sheet, 10 Jul, 2013.).
Prestige began transitioning into a focused consumer health products company through 2010 acquisitions of Blacksmith Brands Inc.’s portfolio and the Dramamine brand from Johnson & Johnson. The firm’s largest acquisition was the $660 million deal in January 2012 for 17 GlaxoSmithKline PLC consumer product brands marketed in North America. Former GSK brands including BC and Goody’s analgesics, Beano gas treatment, FiberChoice supplement and Sominex sleep aid have become main drivers of Prestige’s OTC sales growth (Also see "Prestige Brands Shows International Ambition In Care Pharmaceuticals Buy" - Pink Sheet, 10 Jul, 2013.).
Mannelly explained what the firm looks for in a potential acquisition target.
“We don't start brands from scratch. That's not our DNA. So, for us to start a brand would be a mistake. Our DNA is to buy brands that have equity, that have been neglected, or legacy brands that have more upside than has been realized,” the CEO said.
On Course Despite Headwinds
Prestige plans to maintain its strategy of adding brands and growing revenues for those products even in the face of headwinds, including the return of Johnson & Johnson and Novartis AG OTC brands after product withdrawals and manufacturing stoppages due to quality control problems.
“Where companies get into trouble is they vary. They vary from their course. We're going to stay the course,” Mannelly said.
“We're going to keep investing in our brands, and we've done that, and we continue to invest in our core OTC portfolio and we've increased our [advertising and promotion] spending as a result of that,” he added.
Additionally, Mannelly said Prestige is concerned that retailers are cutting the size of their orders across the board because their revenues are slipping.
When retailers’ sales drop, “historically … the first thing they've done is they reduce inventory,” he said. “It's a very challenging environment from a retail standpoint right now.”
But Prestige’s OTC revenue growth is partly due to stronger sales in a particular retail channel – convenience stores. The firm focused on grocery, drug and mass retailers before acquiring the BC and Goody’s brands, which long have been strong sellers in convenience stores, including service stations (Also see "Prestige Brands Revs Up Goody’s, BC Brands" - Pink Sheet, 11 Nov, 2013.).
“We're getting increased distribution and increased performance in those channels, not just with BC and Goody’s, but with other brands,” he said.
In Prestige’s 2014 second quarter ended in September, the firm’s OTC segment revenues increased 3% to $142.6 million, including the impact of the Care acquisition. Excluding those two portfolio changes, the OTC business grew 0.5%, with the OTC portfolio hit by the market re-entry of competitive products from J&J and Novartis.
Net income was $32.8 million, a 71% jump compared to the year-ago period, partly due to the ownership of Care and largely due to favorable changes in state tax laws that benefited the bottom line by $9.1 million, the company said.