Private equity looks to shoot level Par with $1.9bn bid

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Two burning questions remain after the recommended private equity takeover of the generics firm Par Pharmaceuticals: whether any trade buyers wanting to pay more for Par will emerge and, if so, when.

True, TPG, the US group that yesterday launched a $1.9bn all-cash bid for Par, is making a fairly aggressive move by current private equity standards. But some analysts believe that there is scope for a trade buyer to come in with a sweeter bid driven by cost synergies. TPG, which might be hoping to stoke up trade buyer interest for a quick and profitable exit within a couple of years, will be hoping to have timed its move just right.

A bold move

Private equity is thought to have a large cash pile on the table waiting to be deployed, although actual takeovers are still relatively sparse, perhaps because of continuing risk aversion since the mistimed 2007 take-private of Actavis. That was one of the last big private equity deals done before the credit crunch and recently led to a €257m ($314m) writedown for Deutsche Bank; Actavis is now being sold to Watson Pharmaceuticals.

But TPG is making a bold move for a sole private equity acquirer: although the precise metrics of the Par takeover have not been disclosed, a private equity expert told EP Vantage that with a value of almost $2bn the deal likely comprised a 45% equity element, meaning that TPG was effectively cutting a cheque for some $850m. Given that in the good times private equity might have stumped up only 15% or so of a deal in cash, this is a big bet, even if consensus forecasts prove accurate (see table below).

Assuming such deal metrics, and the fact that in this case private equity’s typical 20% internal rate of return is unlikely to be achieved over a five-year horizon, TPG could be targeting a different model – such as a quick sale to a trade buyer. The trouble for TPG could come if a trade buyer emerges now rather than in two years’ time; Par has until August 24 to solicit superior proposals.

UBS analysts said TPG’s $50 a share offer – 7x to 8x Ebitda – left potential for a higher bid, given that multiples over 10x for similar businesses were not uncommon. They said bids in the mid to high $50s could come from trade buyers capable of driving savings through an existing infrastructure or scaling back Par’s branded sales force.

They also cited the possibility of an ex-US player making a bid as a way of gaining immediate access to the US generics market.

Leerink Swann, meanwhile, view Mylan as the most logical trade buyer because it has an M&A brief and is not currently digesting an acquisition. However, Mylan is unlikely to bid higher, and Par is fairly valued at $50, they said.

2012 2013 2014 2015 2016 2017 2018
Par's free cash flow ($m) 104 147 147 163 175 193 211
EV/FCF multiple 19.2x 13.7x 13.6x 12.4x 11.5x 10.4x 9.5x

Embracing the cliff

In the healthcare space, the fact that private equity interest has fallen again on generics is likely driven by big pharma’s patent expiry cliff, which is seen as a clear opportunity for copycat drugmakers with big enough budgets to build businesses through litigation.

But Par is a relatively small player; it has tended to focus on niche generic opportunities, does not have a large-scale manufacturing infrastructure and might find it hard to compete with lower-cost competitors. This raises the possibility of TPG merging it with another, yet-to-be-acquired, portfolio company to create a bigger business that would be attractive to a future buyer.

TPG has numerous biotech and pharma assets, but appears not to have stakes in any other generics players; Mylan, in which TPG held an interest through Matrix Laboratories, which Mylan bought last year, is now listed as a previously held portfolio company.

That would mean more niche generics players being taken private. If this comes to pass, and trade buyer appetite grows, TPG could find itself to have stolen a march on the competition.

Data based on consensus forecasts from EvaluatePharma.

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