For Aspen and Sigma less is worth more

It seems for Aspen Pharmacare, less is more. The company has offered to buy a large slice of stricken Australian drug manufacturer Sigma Pharmaceuticals for A$900m ($804m), substantially more than the A$648m it had previously bid for the whole pie.

Debt explains the difference, or lack of, as this new deal means the South African firm avoids having to deal with the A$785m Sigma has to pay back to creditors over the next couple of years. As such this looks a good deal for Aspen, but long suffering Sigma investors may be reserving judgement. The hope must be some excess cash is returned to shareholders, rather than immediately reinvested in a business that already looks a shadow of its former self.

Tastier morsel

Given the perilous financial position Sigma managed to engineer for itself, resulting in massive balance sheet write downs, breached debt covenants, profit warnings and the scalp of its chief executive, the company was hardly left in a strong negotiating position with bidders.

As such, Aspen looks like it is taking the tastiest parts of Sigma, for a very fair price. The pharmaceutical unit includes generics, consumer and OTC medicines, and also the company’s orphan and manufacturing business. It has also extracted a two-year non-compete clause from Sigma.

Sigma retains a wholesaling and distribution business which will continue to support the larger drugs business, the profits from which will now divert to Aspen.

Earnings before interest and tax (EBIT) for the division being sold is calculated at A$75m, implying a sales price multiple of 12 times EBIT.

Satisfied shareholders?

Sigma shares climbed 4% in reaction to the bid, to 52 cents; lower than the 55 cents Aspen offered for the whole company in July.

This deal certainly looks a lot better than what was on offer previously, when it looked highly unlikely that a complete takeover was actually going to happen (Sigma's shareholders face tough choices, July 08, 2010). The A$900m will allow Sigma to clear its debts, and then some, which the company indicated today would be spent growing what will be left of the business.

Comments from influential investors today indicate they support the sale, but expect some of the cash to flow their way. No doubt they will be busy extracting firm assurances from Sigma’s management to this effect.

Having seen the value of their investments more than halve over the last 12 months their desires are understandable. Sigma management will no doubt be mindful of placating this group, which stumped up A$300m in an emergency cash call priced at A$1.02 a share only 11 months ago.

As such, keeping big shareholders happy might prove a more prudent path in the short term, over internal desires to get straight back on the growth path.

Monitoring the airwaves

Meanwhile shares in Aspen climbed as much as 2% on news of the deal, ending up only marginally higher at R8,029. The company ended 2009 with almost R2bn ($274m) in cash; this acquisition will largely be funded by bank borrowing. Australia has been a target market for the company for some time, and this move certainly helps it fulfil strategic goals as it will gain around a 25% share of the country’s generics market. 

The question that remains is whether rival bidders will emerge. The deal looks pretty solid; exclusivity has been agreed until October 15 and a 0.5% break fee will be payable should it collapse. It also has to win approvals from shareholders, lenders and regulators.

However, the fact that Aspen shareholders are happy suggests this is not viewed as a knock-out bid. Speculation over the last few weeks raised the name of Watson Pharmaceuticals. Considering the US generics firm has no existing presence in this region it is questionable whether it would be prepared to pay more than Aspen, which will be able to strip out costs.

This does not mean others will not be taking a look. It seems likely that Aspen will prevail, but no doubt both parties will be monitoring the airwaves in the coming weeks.

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