Gov­er­nance ques­tions

Finweek English Edition - - Companies & Markets - BRUCE WHIT­FIELD brucew@fin­week.co.za

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

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