Inside Chile’s bid for Adcock
CHILEAN pharmaceutical company CFR Pharmaceuticals, which is angling to buy Adcock Ingram for R12.9-billion, first took an interest in South Africa’s second-largest drug company last September — six months before it became a takeover target.
Alejandro Weinstein, the third generation to run CFR which his grandfather founded in 1922, told Business Times that while he fancied a deal with Adcock Ingram at that stage he didn’t think it was for sale.
But it all changed in March when Brian Joffe’s Bidvest put in an “unsolicited offer” for Adcock at about R62 a share. This galvanised a stampede of potential suitors for the company that owns household brands like Panado and Bioplus.
The Chilean company is now the frontrunner.
“It appears now there is an opportunity. But this is not impulsive. We’ve known the company for years,” says Weinstein. “CFR has been looking at takeover targets on four continents . . . In this particular case we have seen almost a perfect fit like a glove into a hand. Where CFR is strong, Adcock is weaker and vice versa.”
But CFR had to tread gently, especially after Joffe’s offer was rebuffed by Adcock’s board, which saw it as a hostile attempt to buy the company.
“We were advised to go friendly,” says Weinstein. The tactic seems to have worked: whereas Adcock’s board iced over at Joffe’s advances, it appeared receptive to Weinstein’s.
Weinstein has been in Johannesburg in recent days, flitting from meetings with Adcock’s top brass and shareholders, and juggling the final stages of the due diligence.
If the Chilean deal succeeds, Adcock CEO Jonathan Louw will have former Tiger Brands boss Nick Dennis to thank. At that stage, Tiger Brands controlled Adcock Ingram, before unbundling the company in 2008 and listing it on the JSE.
More than a decade ago, Weinstein met Dennis after Tiger Brands bought some Chilean businesses. There was chemistry, and the two executives discussed possible deals, but nothing came of it then.
Where CFR is strong, Adcock is weaker and vice versa
Nonetheless, Weinstein spent plenty of time in South Africa, visiting the country at least 10 times on holiday and visiting Adcock’s premises.
Sources close to the process say several potential buyers have looked at Adcock, but walked away. They included private equity companies Actis and Ethos.
The stakes might now be too rich for Bidvest. French multi- national Sanofi is also understood to have shown keen interest, but its ardour waned apparently due to its belief that there was too much to fix — and also a “change of control” clause in Adcock’s deal with American firm Baxter.
Adcock is allowed to manufacture Baxter’s products in South Africa under licence — a deal that contributes 18% to 19% of the South African company’s profits — but there is no clarity about what will happen to this deal under new owners.
Adcock nonexecutive director Andrew Thompson told Business Times that the drug company had evaluated offers from various companies.
“We felt it was in the company’s and shareholders’ interests to now make a choice and hopefully develop that into a scheme which we can put to those shareholders.”
Thompson said Adcock would be speaking to multinationals in the next few weeks about licensing deals they have. “We’ve had some discussions with Baxter, and will be engaging with them again. Our objective is to achieve some certainty for them and us should there be a transaction going forward,” he said.
The below-the-radar bidding war has been good for Adcock shareholders. CFR’s offer of R73.51 a share — to be paid in cash and new shares — is 17% higher than Bidvest’s. Nonetheless, it is still a discount to the value some analysts place on the stock.
CFR’s offer is still 4% shy of Adcock’s “intrinsic value”, according to Thomson Reuters StarMine, which placed the SA company stock price at R76.50, based on its most likely earnings growth trajectory over the next five years.
Having an African arm is one factor that attracted CFR.
“We see a parallel within Africa and Adcock, and how to go into sub-Saharan Africa. We were in the same situation in Latin America 30 years ago. We were only based in Chile, and we know how to expand. Adcock is in exactly the same position,” says Weinstein.
What CFR could bring is the fresh energy that Adcock needs. The South African company has been surpassed by rival Aspen, which has done a number of deals to expand internationally.
Adcock’s share price climbed marginally on news of the possible deal, but didn’t come close to the R73.51 price — suggesting investors are still uncertain whether the deal will go ahead, or how it would work.
JP Morgan describes CFR as a “market leader” in several Latin American countries including Chile, Peru and Colombia, with a manufacturing and sales presence in India, Vietnam and Canada.
Weinstein says the company has made a name for itself with “specialist investors”. “We are an emerging-market pharma company with a big difference. We have a big footprint in the southern hemisphere.
“CFR has had double-digit growth in revenue, well over 20% compound average rate for the past five years.”
A combined Adcock-CFR would have a presence in 23 countries, annual sales of about $1.4-billion — nearly triple Adcock’s current $443-million — and boast 21 manufacturing sites dotted around various emerging markets.
The deal is likely to please the South African government. At a “town hall” meeting between Weinstein and Adcock’s management four days ago, CFR said it would shift the manufacture of 300 to 400 products to South Africa, which would create jobs.