Long drawn-out agony
D-Day for Ascendis Health’s all-important debt overhaul has been pushed out. But don’t get too excited
ý When a company is forking out the bulk of its profits to service debt, any delays in buoying up the balance sheet could be disastrous.
Next Tuesday, debt-laden Ascendis Health will finally table its debt recapitalisation plans, and usher in a dramatic restructuring of its operations. These span SA as well as a good number of global markets.
At the time of writing, more than a few Ascendis shareholders were looking on the extended period of negotiations with debt holders Blantyre and L1 Health as a sign that “things are progressing”. Does the delay mean the lenders, who speak for three-quarters of the group’s R6.6bn debt load, might be softening their stance? That’s highly debatable.
Initially, a recapitalisation plan was set to be in place at the end of April. The new D-day is May 11. On the face of it, that’s not a long delay. But when Ascendis’s six-month interest bill is almost as large as its earnings before interest, tax, depreciation and amortisation (ebitda), every extension is costly — and may further strengthen the Blantyre/L1 negotiating position.
Yet there is considerable optimism among a band of mostly retail shareholders, under the Ascendis Activist Investors (AAI) banner.
One of the choice social media comments included a claim that “AAI are gonna change the way things are run at Ascendis Health and this will lead to the greatest recovery in a share on the JSE ever. Time to start looking after retail shareholders and not corporate giants.”
There was also an admission that “the AAI team intend contacting a number of private equity firms that previously engaged Ascendis with restrictions to evaluate the way forward and where possible to support growth of Ascendis to drive shareholder value.”
This would intimate some meaningful upside in the Ascendis share price, from current levels of around 60c. Retail investors who engaged with the FM seem to have pencilled in a worst-case upside of 100c, with a more meaningful spurt after the dust settles on the recapitalisation deal.
The FM is not so sure, especially after reading the sobering comments attached to Ascendis’s latest market update.
The group cautioned: “The company is aware that there has been considerable speculation regarding the group recapitalisation and the potential consequences thereof. The company would like to remind shareholders that they should base their investment decisions regarding Ascendis Health shares on announcements published by the company itself and not on information from other sources, which may not necessarily be accurate or based on a complete set of facts.”
Reading between the lines, that might well be the Ascendis board’s best attempt to temper enthusiasm for a recapitalisation deal that brings huge upside in the short term.
Of course, it’s difficult not to get excited about the potential of Ascendis’s offshore operations — and in particular Cyprus-based pharma group Remedica.
In early 2019 Ascendis received an unsolicited offer for Remedica, a manufacturer of generic pharmaceuticals including antiretrovirals and oncological therapeutic treatments.
Ascendis bought Remedica for €260m (with another €90m due over three years), and there were hopes (before the deal talks fell through) that the sale could fetch as much as R4bn.
At today’s exchange rates the original
€260m purchase price for Remedica would be equivalent to just over
R4.5bn. Remedica was again the star performer for Ascendis in the half-year to endDecember, with revenue of R1.3bn and ebitda of R427m.
A value of R5bnR7bn could conceivably be placed on
Remedica. There might also be decent price tags on the other two offshore operations,
Sun Wave and Farmalider, which generated interim ebitda of R161m and R42m.
In other words, the fighting talk from AAI, which counts 130-million votes in support, is not misplaced. But it just might not be realistic.
The Ascendis interim report reminds us that the standstill funding agreement, signed on June 5 last year, resulted in an “extremely high cost of funding” for the group. Finance costs were a frightening R547m in the interim period — almost twice Ascendis’s market value on the JSE, eating up 85% of ebitda.
Under these circumstances it hardly matters how many votes AAI claims. The negotiating power lies firmly in the hands of debt-holders Blantyre and L1.
One person with knowledge of Ascendis’s circumstances argues there is not much of an alternative to a recapitalisation plan dictated by Blantyre and L1.
“What people don’t seem to grasp is the huge leverage the two key lenders have got … the only way out would be if there were someone who could bring a €400m cheque to the table. Any realistic deal — where you have a value above nought — surely has to be better than letting things slide into business rescue.”
At this stage the FM would speculate that shareholders in Ascendis might look forward to settling the bulk of the debt by relinquishing the offshore operations. That would leave shareholders with the remaining SA operations, plus some residual debt. An orderly sell-off of the local operations might be the best way to return some upside to shareholders in the medium to longer term.
SmallTalkDaily investment analyst Anthony Clark says: “At 60c, I’d wager the ‘odds’ are like having a horse at Kenilworth. It may not come first but second still makes some money.”