Procter & Gamble buys Merck health brands for $4.2B; CEO feels heat as sales slip

Alexander Coolidge | The Cincinnati Enquirer

Show Caption Hide Caption P&G goes shopping in Europe as results beat estimates Procter & Gamble will acquire the consumer health business of Merck for about 3.4 billion euros ($4.2 billion), giving it vitamin brands such as Seven Seas and greater exposure to Latin American and Asian markets.

CINCINNATI — Procter & Gamble said Thursday it will acquire the consumer health business of Germany's Merck KGaA for $4.2 billion.

The acquisition came overnight, hours before P&G unveiled a $2.5 billion profit on $16.3 billion of sales during the third quarter ended March 30, modestly beating Wall Street forecasts.

Organic sales, however, climbed an uninspiring 1% — slower than the 2% growth during the first half. On Thursday, P&G cautioned that its organic sales for the fiscal year would hit on the low end of its previous guidance of increasing 2% to 3%.

The Cincinnati-based company's closely watched gross profit margin also slipped 1% to 48.8%, reflecting the squeeze from higher commodity costs and not enough pricing power.

Stifel analyst Mark Astrachan bluntly labeled the results "disappointing" in the headline of a Thursday note to investors.

"Overall we view the F3Q result as disappointing and suggestive the company continues to lose share in the majority of markets/categories," Astrachan wrote, adding he thought the acquisition would be "modestly favorable" to future sales growth.

P&G (PG) shares dropped 4.6%, of $3.57, to $74.65 in early trading Thursday.

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Analysts turned up the heat on P&G executives on the Thursday analyst call.

"How long should investors be asked to wait (for the company to turnaround)?" Deutsche Bank analyst Steve Powers asked CEO David Taylor.

The first analyst question eerily echoed those posed five years ago to then-CEO Bob McDonald a month before he retired abruptly.

"I'm wondering what Plan B is ... we've heard it's not business as usual for five years now," Bernstein analyst Ali Dibadj said later.

Taylor responded that two businesses, diapers and razors, have proved to be "bigger challenges" than expected.

"I don't think investors have to wait too long," Taylor replied, adding he expected the struggling units to "turn" in the next fiscal year. "It is not business as usual and we're taking the steps to change."

The company had been scheduled to disclose earnings Friday, but probably moved their report up in part to the acquisition. The deal probably has the approval of new board member and hedge fund activist Nelson Peltz who advocated P&G making acquisitions to spur growth.

The deal, expected to close by June 2019, will bolster P&G's $7.5 billion health-care business with strong oral care and gastrointestinal brands with a fast-growing basket of brands doing $1 billion a year in additional business in several over-the-counter categories.

P&G will add 3,500 workers to its worldwide 95,000-member payroll with the acquisition from Merck KGaA. Company executives said it was too early to say how many positions might be cut during the integration.

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Merck KGaA is the Darmstadt-based former parent company of the now independent New Jersey-headquartered pharmaceutical giant that is not involved in this deal.

Top brands include Neurobion, Dolo-Neurobion, Femibion, Nasivin, Bion3, Seven Seas and Kytta that provide remedies to relieve muscle, joint and back pain, colds and headaches and products for supporting physical activity and mobility among other treatments. The brands are mostly sold in Europe, Latin America and Asia.

P&G executives said the deal would "complement" the company's health brands that include Vicks, Metamucil, Pepto-Bismol, Crest and Oral-B.

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“We like the steady, broad-based growth of the OTC Health Care market and are pleased to add the Consumer Health portfolio and people of Merck KGaA, Darmstadt, Germany, to the P&G family,” said Taylor, who added the deal would boost the company's over-the-counter business in the world's top 15 markets.

P&G executives said the acquisition will replace its expiring joint venture with Israel's Teva Pharmaceutical Industries.

P&G generated 95 cents in diluted earnings per share and $1.00 in core earnings per share — beating the 98 cents forecast by Wall Street analysts, according to Zacks Research.

Analysts had expected the company to notch a $2.6 billion profit before one-time items and for sales to climb 3.8% to $16.2 billion. Total sales instead rose 4.3%.

Last year, P&G reported a $2.5 billion profit on sales of $15.6 billion.

Still, P&G openly fretted "a challenging macro environment."

"We have a large business in several difficult markets," Taylor said in a statement.

P&G's sales did benefit from lower prices as unit volume increased and consumers traded up to more expensive products.

While sales were increasing at a slower pace, P&G said the company's core annual profit probably would increase 6% to 8%, improved slightly from the previous range of 5% to 8%.

Follow Alexander Coolidge on Twitter: @alexcoolidge

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