Prestige Brands Navigates Converting M&A Into Organic Growth

The likelihood of Prestige Brands Holdings Inc. making another consumer health business acquisition in 2016 after closing a deal bringing the DenTek oral care line under its roof has analysts both questioning and championing whether it can sustain organic revenue growth.

Prestige Brands on Feb. 4 reported 2.6% growth in latest quarter to $165.1m in US sales of OTC drugs including BC and Goody's analgesic brands and Ludens and Chloraseptic throat lozenge brands. However, international OTC sales, a focus area for growth with brands including Fess cough/cold products and Ecotrin analgesics, dropped 11.2%, due to foreign exchange rates, to $13.8m; without a currency impact, its international sales were up 4.7% to $2.4m.

The Tarrytown, N.Y.-based firm reported revenues for its fiscal 2016 third quarter increased 1.3% to $200.2m, or up 3.2% excluding the currency impact. Adjusted net income for the October-December period increased 11.6% to $28.4m, 53 cents per diluted share, from the prior-year quarter, reflecting adjustments primarily from acquisition-related items.

Prestige Brands on Feb. 8 reported closing its $225m acquisition of DenTek Holdings Inc. from TSG Consumer Partners and other investors following Federal Trade Commission clearance. DenTek products available in the UK and Germany include floss, disposable picks and other oral care appliances; Prestige Brands also adds DenTek’s contract manufacturing business (Also see "DenTek Deal Expands Prestige Brands’ Oral Care Portfolio, OTC Focus" - Pink Sheet, 24 Nov, 2015.).

The DenTek agreement announced in November is Prestige Brands' seventh acquisition since 2010 and continues its consumer health brand and market expansion (see chart).

During the firm's Feb. 4 earnings briefing with analysts, CEO Ronald Lombardi said adding DenTek's line creates a fifth product category for Prestige Brands with at least $100m in annual sales.

The firm's oral care brands also include The Doctor's line of products similar to DenTek's, Efferdent and Effergrip denture cleansers and Gly-Oxide mouthwashes. Women's health, cough/cold, analgesics and eye and ear care also are $100m-plus categories for Prestige Brands (see chart).

"We use our successful and proven M&A strategy as a brand-building tool and our seven acquisitions have been focused on building out the portfolio and categories," Lombardi said.

The DenTek "acquisition will allow us to invest in new product development, build a brand within an already fast-growing category and take advantage of our common outsourced manufacturing model, distribution channels and DenTek's growing international footprint," he said.

For Jefferies analysts, continuing to wield M&A as a growth tool sustains a risk for Prestige Brands. In a same-day research note, they said they not only "remain positively predisposed to the high margin" [and free cash flow] profile of the OTC industry" but also have a concern.

"A key tenet of our cautious view on [Prestige Brands] remains our concern around the [firm's] ability to sustainably drive profitable organic growth in the business," according to the Jefferies note.

At B. Riley & Co., consumer product senior analyst Linda Bolton Weiser does not see organic sales growth as a concern for Prestige Brands. In her research note, she said the firm "has solid organic sales growth trends and could announce another accretive acquisition in the next 6 to 12 months."

In an email, Weiser said the firm's organic sales have accelerated on strong point-of-sale growth and it forecasts 2% to 3% overall organic sales growth for its fourth quarter, which ends March 31, a rate that "is not bad at all, relative to the slow-growth consumer staples sector."

"They certainly would not have set such a goal unless they saw the path to continuing organic sales growth," she said. "I think [Prestige Brands] can sustain relatively healthy organic sales growth, plus it will continue to pursue acquisitions."

Lombardi also noted that with DenTek, Prestige Brands reaches its goal of 80% of its brands being "invest for growth" and 20% being "manage for cash." Before the firm's M&A initiative started in 2010, its brands were split roughly evenly between the two groups, with most consumer health products and all internationally marketed brands making up the growth group.

"We now believe our portfolio is better positioned for long-term organic growth with our biggest brands as great examples of how we can grow share over time," Lombardi said.