Perrigo Eyes Pet Care Market

In a bid to diversify its business into the pet care space, Perrigo Company ( PRGO - Analyst Report ) inked a deal to buy substantially the entire assets of privately-held Sergeant's Pet Care Products, Inc. for approximately $285 million. With this deal, which will expand Perrigo’s customer base, Perrigo expects a tax benefit of about $50 million (net present value). Perrigo intends to fund the deal from its available cash balance.

The acquisition of the assets of Sergeant's, which manufactures over-the-counter (OTC) companion animal healthcare products, is expected to be completed in the second quarter of fiscal 2013. The closure of the all-cash deal is dependant on the satisfaction of certain closing terms and conditions. We note that the fiscal year at Perrigo ends on the last Saturday of June every year. Sales at Sergeant's are forecasted in excess of $140 million for its fiscal year ending September 30, 2012.

The assets of Sergeant's would be part of Perrigo’s Consumer HealthCare business. The completion of the acquisition would see Perrigo enter the consistently growing Pet Care industry, currently valued at $8 billion. Following the closure of the deal, Perrigo’s product portfolio would include good quality, yet affordable OTC channel flea and tick offerings. The products face limited competition since the market has high barriers to entry.

The deal is expected to boost Perrigo’s adjusted earnings by 20 cents per share in the first full fiscal year following its closure. Moreover, the deal is projected to boost Perrigo’s Return on Invested Capital in fiscal 2014.

We remind investors that Perrigo has been quite active on the acquisition front lately to expand its business and drive growth. In January 2012, Perrigo inked a deal to acquire the assets of Georgia-based private company CanAm Care, thereby expanding its presence in the diabetes care market. In July 2011, Perrigo acquired Paddock Laboratories to expand its generic (Rx Pharmaceuticals) business.

We note that there has been quite a bit of activity in the animal health industry recently. Close on the heels of Perrigo’s decision to enter the pet care space, the HealthCare unit of Bayer ( BAYRY - Analyst Report ) inked a deal with Teva Pharmaceutical Industries Limited ( TEVA - Analyst Report ) to buy the animal health unit of the latter in the US. Moreover, in June 2012, Pfizer ( PFE - Analyst Report ) announced its plans to spin off its animal health division.

Our Recommendation

We currently have a Neutral recommendation on Perrigo. The stock carries a Zacks #3 Rank (Hold) in the short run.