The chief executive of Dechra Pharmaceuticals has had his eye on two European veterinary pharmaceutical companies for a couple of years. Ian Page had rung the brothers behind AST Farma and Le Vet to sound them out but they were not ready to part with the businesses they had built.
Fast forward a couple of years and the situation has changed. Dechra bid a number that was close enough to what the brothers wanted and the two entered into exclusive talks. That deal was unveiled to the City yesterday and was well received.
Dechra has agreed to pay €340 million (£298 million) for AST and Le Vet on a debt-free and cash-free basis. The acquisition is being financed 75 per cent in cash and 25 per cent in Dechra shares.
The cash component is made up of a £105 million placing, conducted yesterday by Investec, at £20.50 per share, representing about 5.5 per cent of its share capital. The remaining £124 million is to be debt financed.
Dechra has entered into new banking facilities that leaves it with a debt ratio at completion of the deal of just under two times, falling to an expected 1.7 times at the end of its financial year in June. The company is hugely cash generative and is generally comfortable with about two times. Dechra is reluctant to go above 2.5 times but would if the right deal came along
The AST and Le Vet deal is the latest by Mr Page, who has a track record of bolt-on acquisitions. In the 17 years he has been at the helm, Dechra has done ten.
The last time it tapped investors for money was two years ago when it bought Putney for $200 million as part of its expansion in the US, a smaller but faster-growing market for Dechra. Then it was raising £47 million at £11 a share.
Dechra’s sales growth in Europe has been running at between 5 and 6 per cent a year and the latest deal should increase that to high single-digits. Synergies from the transaction are expected to come mostly from revenues.
Dechra is among a number of distributors of veterinary pharmaceutical products for Le Vet in Europe. Snapping it up means Dechra can capture that business and distribute the products itself. Most of Le Vet’s contracts with other distributors are understood to have “change of control” clauses, meaning they can be terminated quickly.
AST, which specialises in generic and so-called generic plus products, is focused on the Netherlands where it supplies vets directly. Dechra plans to use these relationships to distribute products in the country that are sold through wholesalers.
The deal will give Dechra access to more than 90 registered products with 30 in the pipeline. The portfolio leans towards companion animal products, at about 80 per cent, while the rest is evenly split between horse products and farm animals. The two acquired businesses have net sales of €40.9 million and adjusted underlying earnings of €18.1 million.
The deal bolsters Dechra’s position in Europe, which accounts for about two thirds of the group’s annual sales and where it remains in the mid-league, dwarfed by the likes of Merck, Boehringer Ingelheim and Elanco.
The market remains appealing, according to Mr Page, although animal numbers remain relatively static, people are spending more on them, encouraged by better nutrition and services from vets.
The City welcomed the deal, with the shares rallying above the placing price, up almost 9 per cent to £22.46 yesterday back roughly at November’s record high, as investors expect the deal will be “materially earnings enhancing” by the end of June next year. The shares have been on a good run, up 47 per cent over the past 12 months.
ADVICE Hold
WHY Acquisition bolsters Dechra in Europe and retains scope for further bolt-on deals
CMC Markets
No one from CMC Markets would talk to The Times yesterday. This might just have something to do with its acute embarrassment over several of its male managers taking a table at the alleged grope-fest that was the Presidents Club dinner last week.
The sparse third-quarter numbers will have to speak for themselves. And they don’t look all that bad, given the regulatory cloud hanging over the financial betting industry. The December quarter was better than the two previous quarters by net operating income.
Active clients — those who traded in the quarter — were down by 6 per cent on a year earlier, partly because of the bulge in punters’ betting amid the uncertainty created by the US election in the previous period.
Like the other big spread-betting firms, CMC is focusing more of its attention on the high rollers, who are betting more than ever. Revenue per client rose 33 per cent from a year earlier. An important tie-up with ANZ Bank, which offers a platform for expansion into Australia, is also on track for delivery on time in September.
The big unknown is regulation. Under EU proposals, retail investors will be restricted on how much risk they are allowed to take per pound of initial stake. They also face a ban on trading binary options — bets dubbed “the biggest investment con in Britain” by one consumer group.
CMC looks slow to take mitigating action. IG, its rival, said this week that clients accounting for 25 per cent of its revenues had already been reclassified as “professional” to sidestep the potential rule change, and it was targeting 50 per cent. It began the process of recategorisation in mid November
Some analysts are nervous. Numis has a “sell” rating on the shares, because of worries about the regulatory environment and the inevitable revenue volatility, but the finance industry usually mitigates the worst of any crackdown.
Floated at 240p two years ago, the shares trade at 161¾p, after yesterday’s 3¾p rise. Forecast full-year earnings per share of 15.1p and a dividend of 8.9p would put the company on an earnings multiple of less than 11 and a prospective yield of 5.5 per cent. That looks relatively cheap.
ADVICE Buy
WHY Fears of a crackdown are overblown
