Why Prestige Brands Holdings Inc. Shares Temporarily Soared

Prestige Brands' shares shoot to the moon following an acquisition announcement, but quickly return to Earth. What impact will this acquisition really have on Prestige's bottom line?

Apr 15, 2014 at 1:51PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Prestige Brands (NYSE:PBH), a developer and distributor of over-the-counter health care and household products around the world, briefly jumped as much as 12% after announcing the acquisition of Hydralyte in Australia and New Zealand. Shares have since cooled off and are now up about 5% as of this writing.

So what: According to its early morning press release, Prestige Brands signed an agreement to acquire Hydralyte, an over-the-counter oral hydration therapy following diarrhea, vomiting, fever, and heat ailments, from the Hydration Pharmaceuticals Trust in Victoria, Australia. The deal is expected to close sometime this quarter, is forecast to double the annual revenues of Prestige Brands' Australian subsidiary Care Pharmaceuticals, and is projected to be earnings accretive to Prestige Brands in fiscal 2015. The financial terms of the deal were not disclosed in the press release.

Now what: I believe Prestige Brands hit all the key points that investors would look for in a deal, including a doubling in overseas revenue – ex. U.S. markets are viewed as a big growth opportunity in the over-the-counter pharmaceutical industry –and accretive EPS following the deal. Perhaps the only cause for the waning in optimism is that it's a relatively small deal and perhaps not worth the $162 million in market value that was added on at one point today. Overall, the purchase will only account for about 4% of Prestige's annual revenue, so today's tamer move higher seems to make perfect sense to me.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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