By Brian Graney (TMF Panic)
May 1, 2000

Contrary to its name, mass market vitamins and nutritional supplements maker Rexall Sundown (Nasdaq: RXSD) headed up this morning after the company agreed to a $1.8 billion buyout offer from the Netherlands' Royal Numico N.V. Under the deal, Royal Numico is offering $24 per share in cash and is assuming $114 million in net debt to digest Rexall Sundown, whose stock price quickly ramped up in early trading to within 3% of the buyout price.

Somebody must have put something in the water over at Royal Numico's home base in Zoetermeer, Netherlands, as the company is fast rolling up a major chunk of the U.S. vitamin and nutritional market all by itself. Today's acquisition of Rexall Sundown comes less than a year after the Dutch firm bought top U.S. nutritional retailer General Nutrition Companies (GNC) for $2.5 billion, and the company's top boss hinted in a Bloomberg interview this morning that more purchases may be on the way.

Rexall Sundown adds more consumer brand names to Royal Numico's product stable, as well as access to the important U.S. grocery and drug store distribution channel. While the acquirer stated that the deal will add to earnings "immediately," this is a synergy story all the way and is designed to better leverage Royal Numico's core competencies in nutritional research and product development. The deal is expected to close during the current second quarter.

In terms of valuation, the Rexall Sundown's buyout price was substantially similar to what Royal Numico shelled out last year for GNC, which was also acquired for cash. At a price of $1.8 billion, Rexall Sundown is being valued at 2.77 times its trailing 12-months sales and 29.6 times trailing earnings. Last July, GNC fetched 1.75 times trailing sales and 32.3 times trailing earnings. However, GNC at the time of its buyout was much more leveraged than Rexall Sundown is today. Further, its operating margins were also inferior (11% for GNC versus 16% in the most recent quarter for Rexall Sundown).

While superficial, this analysis suggests that Rexall Sundown is being snatched up at more of a bargain-basement price compared to GNC last year. While the larger of the two companies, GNC's economics were not as compelling as those at Rexall Sundown, a factor that nonetheless failed to show up in today's buyout valuation.

Keeping an eye on recent take-out valuations is always a worthwhile pursuit for investors, especially those involved in a rapidly consolidating sector such as vitamins and nutrition. Prices in the secondary market don't always match up to prices in the private acquisition market, so deals like today's can give clues as to what kind of price tags similar companies might be able to expect. Given Royal Numico's posturing today, its shopping trip in the U.S. may not be over.

That's an interesting point to keep in mind for shareholders of a company like NBTY Inc. (Nasdaq: NBTY). One of the last of the large, profitable, pure-play supplement makers out there, NBTY is currently valued in the market at 1.71 times trailing sales and 27.2 times trailing earnings -- somewhat of a discount to Rexall Sundown's buyout value. But with its more leveraged financial structure relative to Rexall Sundown, NBTY shareholders may not be able to expect much more in terms of a takeover premium if Royal Numico decides to come knocking.

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