The largest takeover in Britain this year has been the agreement by a Swedish private equity firm to purchase Dechra Pharmaceuticals, for £4.46billion.
After a recent profit warning , the London-listed veterinary product maker advised its investors to accept the cash offer of EQT at £38.75 per shares.
EQT secured the support of Abu Dhabi Investment Authority in the deal. Its offer represents a 44 percent premium over Dechra’s share price prior to the public announcement. Dechra’s shares climbed 258p or 7.7 percent to close last night at £36.32.
Dechra is based in Cheshire and develops veterinary products. It has eight production sites. About 2,300 people work for the company. The company was included in the FTSE 100 index after its shares benefited due to lockdown pets’ popularity, but since then its share price has halved.
The company warned its profits would be affected by wholesalers’ holding less inventory in the United States as well as Britain. The company said that there was a sign of a recovery in American orders, but the European market seemed to be slowing down.
EQT as well as Abu Dhabi Investment Authority reduced the initial offer price to £40.70 a share. They said private ownership would enable Dechra’s management team take a “longer-term perspective” of the company’s prospects.
Analysts at Numis (the broker) Kane Slutzkin, and Paul Cuddon said: “While it is below the initial price, we believe that shareholders will support it in light of the recent events, and the unquantifiable downward revision to the forecast for the financial year 2023, and the possible risks to the forecasts for 2024.”
Panmure Gordon stated that EQT’s price reduction reflected the short-term dynamics of the pharmaceuticals sector, but noted that it was still a “category-leading” offer. The broker stated that it was clear that EQT has a long-term view for Dechra. This is especially true in relation to the pipeline. The broker said that it was difficult to make an independent assessment about what Dechra’s pipeline means, because historically there has only been a limited amount of information available.
The company tends to disclose information on its pipelines for assets or programs that have made progress in de-risking or where there is precedent to approve the program.
Newton Investment Management (which holds a 0.5 percent stake in Dechra) has warned that EQT’s bid undervalues a pipeline of pharmaceuticals from which existing shareholders can expect to gain.
Dechra’s stock price has halved since last month, and the veterinary products maker issued a profit alert.
Louise Kernohan is an equity portfolio manager for Newton Investment Management. She said that the offer didn’t take into consideration Dechra’s acquisitions Piedmont Animal Health, and Med-Pharmex. She is also concerned that shareholders may not reap the full benefits of a license agreement with Akston Biosciences.
Royal London Asset Management is also against the deal. It’s one of Dechra’s top ten investors. Henry Lowson of Royal London’s UK alpha equity said that the veterinary division had “strong growth potential as a stand-alone entity” due to its pipeline of animal medicine.
The Competition and Markets Authority could be interested in the deal. Recently, the regulator blocked Medivet’s purchase of 12 vet clinics by CVC Capital Partners. Medivet is a large group of veterinary practices. EQT owns IVC Evidensia a British chain of vets and also has investments in ManyPets a pet insurance company and Zooplus an online pet food store.
Elizabeth Platt (66), chairwoman of Dechra said that bidders will “prove themselves to be responsible owners and supportive.” . . We believe that this proposal is in the best interest of all parties and, for shareholders, it represents an opportunity to realize, in cash, and with certainty, Dechra’s future potential value.”
Dechra, a mid-sized London-listed company, was one of three companies targeted by private investors in a week when it announced that EQT Partners had made an April offer to buy the veterinary group.
In addition to the bid war for Network International and Apollo’s interest in THG the troubled online retailer of beauty products, other British companies that have been targeted by institutional investors include Hyve the events group and John Wood the specialist engineer.
Investors in institutions are taking advantage of the discounts offered by London-listed companies compared to those listed on European and American stock markets. The UK stock exchange trades with a price-earnings ratio of under 17 compared to multiples of 21, 29 and 21 for European and US stocks.
Private equity tends to be more active when the bad news has been released and the economy and/or companies start to show signs that they are recovering, but this is not yet reflected by the share price. “You could argue that these conditions are present now,” Graham Simpson said, an analyst with Canaccord Quest. He said that companies that produce high amounts of cash, or those with little to no debt were the “low-hanging fruits” that were still available for purchase because they are so undervalued.