Event - Grifols secures funding for Talecris as hopes grow for FTC approval

Analysis

Grifols has secured the $3.4bn loan needed to pay for its transformative takeover of Talecris Biotherapeutics; now all it needs is clearance from competition authorities . A crucial decision from the US Federal Trade Commission (FTC), the body that derailed CSL's attempts to buy the US blood plasma company last year, is due later this year or early 2011.

Given its much smaller size relative to CSL, Grifols would appear to have a better chance of appeasing antitrust regulators, although it may still be required to sell some of the combined business to pass muster. However, unconfirmed reports that the US will seek to block the transaction have caused shares in the Spanish company to lose 17% since the beginning of the month. With a painful $375m break-fee payable if the deal does collapse, Grifols will be hoping the festive period brings good cheer from the FTC.

Company  Grifols  Talecris Biotherapeutics
Market cap  $2.68bn  $2.76bn
Event type  M&A approval decision by US FTC
Date  End 2010 / start 2011

In June, Grifols agreed to buy Talecris for $3.4bn, or $4bn including debt, a deal that will almost double the size of the Spanish company (Grifols seeks infusion of Talecris for future growth, June 7, 2010)

The Deal published a report earlier this month claiming the transaction would be blocked by the FTC, sending shares in Grifols tumbling as the situation started to look horribly like CSL's fated takeover attempt (CSL’s reality check sinks Talecris deal, June 9, 2009).

The FTC raised concerns that CSL's resulting huge market share – greater than 80% in some sub-markets such as intravenous immunoglobin (IVIG) – would be too much for smaller rivals such as Grifols. Faced with a resource-draining legal battle with the FTC, CSL decided to pull out of the deal. 

Still, many observers believe Grifols has more chance of winning a green light.  Grifols’ $2.7bn market cap does not compare to the weight of CSL’s at $17.8bn. It also has a very minor presence in the current US market, which it hopes to expand through Talecris, and the combined company would still sit in third place behind Baxter and CSL. (For an analysis of the blood plasma market see this article: Shares in plasma companies bleeding value over slowdown fears, April 26, 2010)

Grifols chief executive Victor Grifols said in June that not one combined product is expected to reach the critical market share that concerns the FTC. These points were reiterated in the press by Talecris’ CEO Larry Stern last month.

Added debt

Grifols shares climbed 3% today, to €9.65, upon announcing the loan and an upgrade to "buy" from UBS. The bank's analysts believe the outcome of the situation is uncertain, they put a 33% chance on the deal going ahead, and a 33% chance of it going ahead with conditions.

Aside from the Talecris deal, UBS reckons the recent withdrawal of an IVIG product by plasma drug developer Octapharma, representing an 11% share of the lucrative IVIG market, is good news for Grifols and its competitors.

If the deal is approved, adding Talecris' debt and the loans to fund the acquisition would boost Grifols debt ratio substantially, from 2x underlying profits to 5x. However, this ratio is expected to return to its current level by 2014, funded by the increased cash flow. Despite this, earnings will grow significantly in a short period time - by 20-30% in a couple of years, according to UBS - and Grifols would never be able to expand as quickly organically, so the rationale behind the deal is clear.

Looking for an exit

Meanwhile, after the failure of last year’s CSL deal, Talecris’ investors, keen for an exit, will be hoping for the go-ahead. Cerberus Capital Management, which holds a 49.7% stake in the company, stands to gain $2bn if the merger is approved, 26 times its original investment according to The Wall Street Journal.

In securing funding for the transaction, Grifols has lifted hopes of the merger going ahead. But the FTC still holds the key.

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