Greenberg: Questions about Carlyle's Acquisition of NBTY

Carlyle’s deal to buy NBTY, the vitamin company, for $3.8 billion stopped me in my tracks.

NBTY has been a long-standing tug-of-war stock between the longs and shorts.

The company has grown largely over the past 20-plus years through acquisitions of weaker competitors. The deal-making culminated two years ago with the acquisition of Leiner Health Products, a troubled private-brand manufacturer of vitamins.

The concern of any branded company going downscale to private-brand is that its margins will suffer. (I had this very conversation the other day in the Green Room at CNBC with Heinz CEO Bill Johnson, who has gone the other direction and wants nothing to do with owning private-label companies.)

However, with NBTY, after the Leiner acquisition, margins rose, the company cut expenses and improved operations and efficiencies.

But the effects of merger-related efficiencies only last so long and private-label is highly competitive.

That became obvious in NBTY’s most recently reported quarter, when it said margins were under pressure. Among the reasons: Competition in the private-label space. Which brings us back to the Carlyle deal.

The margin comments caused its stock to tumble even as cash and cash flow were rising—both of which may have become a lure for private equity, which is attracted to any company with cash.

But the quality of NBTY’s earnings has been suspect, a target of critics; in fact, the earnings quality indicator on NBTY at Cash Flow Analytics—while up in the past year—has been falling in recent years on a trailing four-quarters basis.

My point: I always like to ask who is smarter—the seller or the buyer.

In this case, the seller would appear to win. If you didn’t know better, you would think NBTY has run out of acquisitions, cost-cutting and other tricks to keep its stock story alive. And private-equity, flush with cash and nowhere to put it, is stuffing it in lower quality deals.


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