Perrigo puts personal care on the selling block, will close two manufacturing facilities.

PERRIGO TO DIVEST PERSONAL CARE BUSINESS to concentrate on its over-the-counter drug and nutritional supplements businesses, the company announced June 29. The Allegan, Mich.- based private labeler has retained the investment banking firm J.P. Morgan to explore "strategic options to maximize the sale value of the personal care business." The plan to divest personal care is part of a greater management restructuring to help Perrigo improve its margins and enhance its profitability.

The personal care business, with sales of $206.5 mil. in FY 1997, has been Perrigo's second largest unit after OTCs ($526.5 mil.). The firm's nutritional sales totaled $110.4 mil.

The personal care exit follows several years of "concentrated effort and significant investment" on the sector without achieving an "acceptable profit," Perrigo said. The business saw strong growth until the fiscal year ended June 30, 1997, when sales of personal care products decreased 2.7% to $206.5 mil. Profits, on the other hand, have been sluggish in recent years, with margins challenged by the marketing-driven nature of the personal care arena.

To improve the division's performance while Perrigo shops around the personal care business, the company is restructuring operations by appointing a separate personal care management team. Perrigo Exec VP Jim Bloem becomes president of the new personal care organization "and will lead an experienced team of Perrigo executives committed to serving customers in a profitable manner," the company said.

The decision to divest with a new, strong management team in place was made to ensure that customers continue to receive the same service and quality level for personal care products after the changeover, Perrigo explained. The company plans to "work closely" with the new personal care organization to ensure a smooth transition.

The creation of a management team also raises the possibility of a management-led buyout. As the largest supplier of private label personal care products in the U.S., Perrigo may have difficulty finding a buyer able to maintain the company's level of production and distribution.

In an additional effort to reduce costs and improve efficiencies, Perrigo announced plans to close manufacturing facilities in San Bernardino, Calif. and St. Louis, Mo. The closing of the 69,000 sq. ft. plant in California and the 196,000 sq. ft. facility in Missouri involves the sale of certain assets and the elimination of approximately 160 positions, the company noted.

The closures, consolidation of manufacturing operations and the write-down of assets will result in nonrecurring pre-tax charges of approximately $100 mil. to $125 mil. in fiscal 1998, Perrigo estimates. Over the next fiscal year, the company anticipates an additional $5 mil. to $10 mil. in operating losses and restructuring related expenses. The charges are expected to result in a net loss for the fourth quarter and for the fiscal year, the company said. The firm said it anticipates earnings before the loss to be below analysts' expectations.

After the charges, Perrigo expects to yield $7 mil. to $10 mil. as an ongoing benefit to its operating profits. The challenge to the company as it moves forward without personal care will be building its nutritionals and OTC businesses into more profitable units. Explaining its lower earnings, Perrigo points to weak demand in higher margin OTC pharmaceutical products, increased expenses due to higher R&D costs and expenses related to new product launches, in addition to declining profitability in personal care. In the firm's 10-Q filing for the third quarter, the company reported working capital of $189.6 mil.