No sure-fire remedy for debt pain at Ascendis

Health group reeling after ambitious growth strategy puts pressure on its share price

● In what appears to be a growing tale of caution, Ascendis Health is the latest South African health company to find itself on the wrong side of the market as it battles to repay debts amid an aggressive growth strategy.

SA’s health market has seen its fair share of challenges of late, operating in a lowgrowth environment, and Ascendis has not been exempt from this as it goes up against industry giants such as Aspen Pharmacare and Adcock Ingram.

The health and wellness company’s beginnings stretch back to just over a decade ago and it listed on the JSE six years ago.

It produces products in the consumer health, pharmaceutical, medical, animal health and bioscience categories.

Like some of its competitors, Ascendis had aspirations to scale up and have an international footprint. It began its strategy towards that goal between 2015 and 2017, acquiring four businesses in Europe: Scitec in Hungary, Sunwave Pharma in Romania, Remedica in Cyprus and Farmalider in Spain.

However, this ambition has become its downfall, with the company’s results for the six months ended December showing that its debt stood at R4.8bn, of which R3.4bn is euro-denominated, and its market capitalisation is currently R1.8bn.

“Ascendis, like many other companies, fell into the classic equity trap … they used cheap debt to acquire lots of companies at fancy ratings,” said Anthony Clark, an analyst at @Smalltalkdaily Research. “You can go back many years, this is a classic case, look at [Edcon’s] Edgars, look at Coast2Coast, which owns Ascendis, look at Aspen, look at Steinhoff, all these companies that grew rapidly through acquisition or taking on debt.

“When the economy starts weakening, the companies, structurally, are not strong enough to support and pay back the debt they took on to create the company in the first place. That’s the problem with Ascendis,” said Clark.

To solve its debt problem, Ascendis has begun selling its assets across its business units. These include the R130m Isando factory sale concluded last year and the divestment of some of its biosciences businesses, Efekto, Marltons and Afrikelp. The brands produce products such as growth stimulants and insecticides.

On Monday, in his presentation of the results for the six months ending in December, Ascendis CEO Thomas Thomsen said talks regarding the sale of the biosciences businesses are at a very advanced stage and should conclude within six months. The company is also in talks to divest of its generics business, Remedica, based in Cyprus. Less than three years after it acquired Remedica for R4.4bn, Ascendis received an unsolicited offer for it and has been in talks about the sale since January.

“A successful sale of Remedica will have significant implications on our strategic direction in our business because Remedica is at the core and we believe it makes sense to relook at the strategy, the focus, once we are clear on the outcome of the process,” said Thomsen.

But Clark said it would be hard for Ascendis to realise a good price for its assets.

The group now has to rethink its strategy, restructure its balance sheet

“In a weak economy, in a weak environment, those assets are now what I call vulture assets. People will only take what they think they are worth, not what they are truly worth,” he said.

After Monday’s presentation, Ascendis’s share price fell more than 9%, causing further damage to the stock that has been on a downward spiral since November 2017 when its share price reached highs of R20. It is now at just over R4. In November 2017 Ascendis also had a R750m rights issue.

Private equity investor Coast2Coast bought almost all the shares from Ascendis after the rights issue and began forced selling them late last year.

Samantha Steyn, chief investment officer at Cannon Asset Managers, said it was unlikely that Ascendis would have a capital raising because Coast2Coast has been selling shares, which has resulted in further pressure on the share price.

She said that because Ascendis’s debt is mostly in hard currency, the rand’s weakening will make servicing it expensive.

“The group now has to rethink its strategy, restructure its balance sheet and sell off assets to cut debt. And unfortunately, as seen with Aspen, the easiest assets for Ascendis to sell will be the best-performing ones.

“The remaining portfolio therefore arguably represents a less attractive prospect for investors, and investors’ lack of confidence in the company has been reflected by a 60% drop in the share price over the past year,” she said.