Mad Money

An M&A Moneymaker?


“Takeovers are roaring back to life,” Cramer said Friday, “and we’re anxious to make money off the half a trillion odd deals already announced this year.”

The Right Formula?

He’s specifically looking for acquirers whose stocks shoot higher when these deals are announced. Typically the buyer’s share price drops because investors fear dilution or increased leverage or some other potential negative for the company in question. So when the stock goes up, that’s a sign of strength. All week he’s offered up his favorites from this select group – Phillips-Van Heusen, Triumph Group and Teva Pharmaceuticals – and today he finished the series with one more.

Over-the-counter drugmaker Perrigo just made a “smart takeover,” Cramer said, that extends its reach into yet another aisle in your local pharmacy. He had already recommended the stock in February – it’s up 27% since – but this new deal “makes the story even more compelling.”

Perrigo was largely known as the world’s largest manufacturer of over-the-counter private-label drugs, but the company also dabbles in generic drugs and active pharmaceutical ingredients. Then on March 23, management announced they were buying PBM, a privately held maker of store-brand infant formula and baby food for $808 million. Wall Street immediately blessed the deal, taking PRGO up 12% in just one day.

Perrigo delivered a terrific quarter in early February, beating the Street’s earnings estimates and boosting its full-year 2010 guidance before the PBM deal was announced. Now that acquisition is supposed to add another 10 cents a share to company’s fiscal 2011.

But back to that previously mentioned additional aisle of dominance. Perrigo just moved into baby food – after already having a huge share on the painkillers, cough and cold medicine, stomach medicine, first aid and vitamin shelves – and this aisle “is a better place to be,” Cramer said. PBM’s products carry wider margins and the business holds much higher barriers to entry, as PBM is one of just four domestic manufacturers with Food & Drug Administration approval for infant formula. And it’s the only one that’s private label.

Lastly, PBM controls 85% to 90% of the store-brand baby food and infant formula market, yet there’s still plenty of room to grow. Because private-label baby formula right now comprises only 10% of the $24 billion in global pediatric nutrition sales. Also, PBM products are half the price of name brands, and the retailers that sell them earn margins that are often four times higher than those of name brands. So there’s an incentive for drug stores and supermarkets to choose PBM over its competitors.

Cramer thinks Perrigo’s stock has “much more room to run,” he said, “especially if you can buy it before the deal closes and all the lemming analysts raise their 2011 numbers.”

Cramer's charitable trust owns Teva Pharmaceuticals.

Call Cramer: 1-800-743-CNBC

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