The last couple of years have not been kind to the UK university IP commercialisation space. The high profile blow up of Circassia in June last year only helped to cement suspicions that these start-up incubators were failing to deliver the sort of exits and returns that many had hoped to see, and stock market valuations have been suffering.
Hence today’s move by the biggest operator on its closest rival – IP Group and Touchstone, formerly Imperial Innovations – is understandable. With a substantial overlap in their respective investor bases, a huge proportion of which have come out in favour of the transaction, the merger is effectively a done deal. Smaller players must be wondering if they are watching their own fate unfolding (see table below).
Alongside the all-share offer for Touchstone, IP Group also announced plans to raise £200m ($260m) in a share sale – £135m of this is already committed. Partly, the new funds have been secured to set up IP Group Australia, a third region for the company. Since 2000 IP Group has forged agreements with 16 UK universities and five in the US; nine institutions in Australia and New Zealand will now join the fold.
With such a sizeable fundraising in the offing the company clearly decided to lay all its cards on the table and press ahead with an offer for Touchstone at the same time. The approach has yet to receive formal backing from the target’s management team but this is largely moot – Touchstone shareholders owning 74.3% of the stock having signalled their support.
These shareholders are Invesco Asset Management, Woodford Investment Management, and Lansdowne, institutions that have lent huge support to the IP commercialisation space in the UK. They appear on the shareholder register of similar companies below; Allied Minds and Puretech Health are US companies attracted to list in London, partly because of this institutional support.
|Backing companies that own companies|
|Company (date of record)||Investor||Holding|
|IP Group (3/3/17)||Invesco||25%|
|Touchstone Innovations (12/10/16)||Invesco||39%|
|Allied Minds (31/12/16)||Woodford||28%|
|Puretech Health (31/12/16)||Invesco||32%|
|Arix Bioscience (May 2017)||Woodford||31%|
|Founders & management||19%|
The proposed merger between IP Group and Touchstone must raise the question of whether this support is flagging. These three investors were obviously prepared to accept a very minimal premium for Touchstone, which reported a net asset value (NAV) of £472.4m at the end of its fiscal first half, January 31. This was equal to £2.93 per share, hence the all-share offer from IP, which implies a valuation of £3.07 per share, does not on the surface look generous.
NAV is an important metric for these groups as it reflects the combined value of the entities in which they are invested, plus and minus cash and debt. In good times it could be expected that their stock market value exceeds NAV, however in most cases this premium has been eroding over the last 18 months or so.
The perception of a growing rump of investments that are struggling to go anywhere has not helped these groups – unless the start-ups that they have backed can float or be sold, their value will remain a footnote in the accounts. And of course calamities never help – the collapse of Circassia’s allergy research last year prompted Touchstone to slash the value of its investment by 69%. The Imperial College spin out represented its biggest bet and had accounted for around a quarter of the net fair value of its portfolio companies.
IP Group is even more exposed to a single investment in the form of Oxford Nanopore, a very high profile start up (Healthcare unicorns and where to find them, May 23, 2017). The DNA analysis firm currently represents 40% of its total company portfolio, which at the end of December was valued at £614m.
The proposed merger would considerably lessen IP's exposure to the fate of this one company. It would also bring access to the “golden triangle” of UK universities with which Touchstone has alliances – Imperial, UCL, Oxford and Cambridge.
Thus the short-term motivations for IP’s empire building are clear. It is less certain whether investors will make much money from university IP commercialisation in the longer term. Still, if economies of scale are important, then IP Group appears to be on the right track.
This story has been updated to include the shareholdings of Arix.