SHARES IN South Africa’s number three generic drugs distributor – Cipla Medpro (CMSA) – are retaining their elevated levels despite the decision by Adcock Ingram to abandon its bid for the smaller company. The share is trading around 390c on a multiple of 13 times. That’s not far off levels seen while the deal was in the offing.
Despite the deal having fallen away, analysts remain enamoured by its investment case – even though some harbour lingering concerns about governance and the influence wielded by founder and CEO Jerome Smith on the company’s board.
“We sold at 420c but have been buying back shares recently,” says Mashuda Cassim at RMB Asset Management, who has been rebuilding a stake in the firm since cashing in at what she regarded as elevated levels spurred by the possibility of a bid.
She wasn’t alone in that strategy after it became apparent the deal wouldn’t be consummated. However, other shareholders remained invested and didn’t seek to make a gain on the uncertainty about the deal.
The Adcock bid has done a number of things for CMSA. It’s raised its profile in the investment community: before the bid it was a tidy R1,5bn generic drugs maker and distributor but analysts preferred the prospects promised by Aspen Pharmacare. Investors now better understand its business model and the potential offered by its special relationship with Cipla India. However, that higher profile is also likely to see growing shareholder activism concerning core governance principles – in particular its board, which has only one permanent independent non-executive director.
CMSA acknowledged that weakness when forced to bring two independent non-executives into its fold, ostensibly to help its board make an appropriate recommendation on the Adcock deal. When a recommendation wasn’t made, Adcock withdrew and asked the JSE to investigate whether CMSA was in contravention of its listings requirements.
But CMSA has been defiant. While it hasn’t commented directly on the merits of the Adcock complaint it said it had been under no obligation to respond to the company’s advances, as the firm hadn’t actually made an offer. That’s technically correct.
CMSA management has gone to ground since issuing a statement in the first week of June seeking to explain its reasons for not responding to the Adcock bid. Adcock had proposed a deal at 475c/share – valuing CMSA at R2,1bn. At least one empowerment shareholder in the Sweet Sensation consortium, which owns 19% of the company, says confidentially the offer was too light and would leave them underwater and they wouldn’t have supported a deal at that level.
In its statement to shareholders, CMSA also finally lifted the veil of uncertainty about its relationship with Cipla India. Adcock had suggested the possibility of a “poison pill” agreement contained in a contract between the parties that prohibited a takeover by a third party without both firms’ consent. CMSA denies the existence of such an agreement.
Buying back. Mashuda Cassim