Reckitt Benckiser yesterday agreed to buy Boots Group's non-prescription drugs business for a higher-than-expected £1.926 billion in cash bringing its Lemsip and Disprin cold remedies together with Boot's Nurofen painkiller.
The health and beauty group Boots, which is seeking to shore up its planned merger with Alliance Unichem, said it intends to return around £1.43 billion to its shareholders via a special dividend.
Investors cheered the high price achieved by Boots, lifting its shares 1.6 per cent to 632 pence by 8.20 a.m., having touched an early high of 640p. There was some concern that Reckitt had over-paid but its stock rose 3.6 per cent to £17.70, after losing 1.8 per cent on Thursday.
"This was a full price but there are considerable synergies while this is a high growth and high margin business and will be earnings enhancing from year one," said Reckitt Chief Executive Bart Becht in a conference call.
Mr Becht said Reckitt was paying around 20 times earnings before interest, tax, depreciation and amortisation (EBITDA) against recent similar deals which were priced at about 13 or 14 times but Mr Becht argued the Boots businesses was top quality with leading brands and a strong growth potential.
Reckitt, the world's biggest household cleaning goods group, and drug group GlaxoSmithKline had been seen as frontrunners from the six companies which put in final bids for Boots Healthcare International last month.
Industry sources told Reuters late on Thursday that Reckitt was set to win the auction after outbidding its rivals.
Reckitt said it hopes to make cost saving synergies of £75 million and £130 million of net working capital synergies by 2008 and the deal is expected to be immediately earnings enhancing, excluding a £150 million one-off restructuring charge.
The auction was initially expected to fetch around £1.2 billion but was pushed higher as bidders saw they could extract significant cost savings by adding Boots' products to their own existing brands.
Keen bidding also reflected expectations that the over-the-counter medicines market is set to grow in the years ahead, driven in part by government moves to make people more responsible for their own health.
Reckitt will add the Boots business, which also includes Clearasil skin products and Strepsils throat lozenges to its health and personal care division, which includes antiseptic Dettol, Veet depilatories and heartburn treatment Gaviscon.
Boots plans to buy Alliance to create a pan-European drugs retailer and distributor with more than £13 billion in sales. But the tie-up, which has received a cool reception from investors, is conditional upon it selling BHI.