NBTY To Acquire Rexall?

Why NBTY may or may not be in the running to purchase Rexall.

By Adam Ismail

In November last year, when Numico, Zoetermeer, The Netherlands, an­nounced its intentions to sell its Rexall Sundown, Boca Raton, FL, division, all eyes turned to NBTY, Bohemia, NY. This was because many people felt that the company was the only one large enough to acquire the division. Outside of NBTY there were a handful of private investors that were interested as well, including the DeSantis family, who founded and sold Rexall to Numico in the first place, but were then ousted from the division after it under-performed expectations.

Analysts estimate that Rexall would sell for between $200-$400 million, a far cry from the $1.8 billion that Numico paid for it three years ago. According to its last quarterly filing, NBTY does not have that much cash or savings available to pay for the business, which would leave it two options, raise equity financing or borrow the money. With a market capitalization of $1.2 billion, issuing $200 million in stock would dilute its current shareholders by over 15%, erasing a large portion of the gains its shareholders made in the past year. However, in fairness, the company may benefit more in the long term if it could turn Rexall around.

If NBTY chose to borrow the money, they could in effect over-borrow and strain its resources for growth in the future. NBTY’s working capital position has grown dramatically over recent years, from $89.1 million in 1998 to $185.7 million last year. As long as a company’s sales are growing, this is usually a good thing because it means there are more resources available to fund the operations of the business. However, that single metric does not necessarily tell the whole story. To determine how many resources the company needs to continue growing, the money that is being borrowed must be factored into the analysis. After all, a well-run company like NBTY would not borrow if it had no need for those funds. In reality, that money is vital for funding the operations of the business.

NBTY has done very well financially in the past because it has not relied on higher interest short term debt to fund these operations. However, the company is heavily leveraged with long term debt. Last year its working capital balance was just over 19% of its sales and financed a large 19% jump in sales. Next year, based on guidance by the company, it expects to grow its revenues another 12% to $1.06 billion. If it keeps the working capital-to-sales ratio constant, it will likely require $204 million in funds to finance this growth, of which it already had $201 million at the end of its first quarter. So far, so good.

Now throw in a $200 million acquisition, which means another $200 million in borrowed funds and the company’s outlook could change significantly, because that does not mean it will only need $200 million. In addition to the additional borrowing, the company would likely need to spend, or borrow, another $100 million just to finance the required working capital increase at Rexall, which had $526 million in sales last year. In addition, there would be required investment into turning Rexall around. These additional borrowings could hinder NBTY in the future as it may not be able to finance further organic or external growth with funds it generates from its operations.

This does not mean an acquisition by NBTY is out of the question, it simply raises a number of issues. In a best-case scenario, it could push Rexall into the NBTY operating model quickly and limit the borrowed funds it would require, but that would mean laying off hundreds of employees in Florida, closing Rexall headquarters, consolidating manufacturing and more tasks that would take many months to complete. The management team at NBTY is very smart and very shrewd, however, and if it does acquire Rexall, you can bet it will be at a bargain price, giving them some needed flexibility.NW