Sunday Times

Ascendis mulls ways to avoid a rescue


● The troubles of Ascendis Health, which is drowning in debt, were laid bare this week when the group reported interim results that show its underlying businesses, particular­ly those offshore, are pumping out cash.

If it were not for its net debt of R6.6bn, investors would likely have cheered Ascendis’s results for the six months ended December 2020, which show group revenue increased 33% to R3.98bn. Its Europe division delivered the best growth of 35%, while South African revenue came in 30% higher. Overall, group gross profit grew 29% to R1.8bn.

But like Icarus flying too close to the sun, Ascendis — which has interests in pharmaceut­ical, consumer and animal health — took on too much debt in its quest for growth after listing in 2013 and this has come back to bite it. With its debt dwarfing its market capitalisa­tion of about R250m, the company said this week it would either have to reach a recapitali­sation agreement with investment companies Blantyre Capital and L1 Health, its main debt-holders, or face business rescue.

If an agreement is not reached or if 75% of shareholde­rs do not approve the recapitali­sation, the company will enter business rescue, Ascendis said in a Sens statement.

Business rescue is probably the last outcome investors would want, with the company itself saying in the statement: “In an accelerate­d business rescue-driven asset disposal process, it is possible that the outstandin­g debt may exceed the proceeds from a distress sale of assets. In this worst-case scenario, shareholde­rs are likely to receive minimal to zero value.”

Former House of Busby head Mark Sardi, who was brought in as CEO in 2019 to turn the company around, says he is “happy to achieve a consensual restructur­e or recapitali­sation of the debt”, and that Ascendis, Blantyre and L1 prefer this option.

Avoiding business rescue is the preferred path for all parties, Sardi says. “We fundamenta­lly believe the underlying businesses without debt can kick onto the next level given how well they’ve performed in a liquidity constraine­d environmen­t.”

Small Talk Daily analyst Anthony Clark has repeatedly stated that the only real option for the company is a “debt-for-asset swap” with Blantyre and L1, which would see the two taking stakes in Ascendis’s underlying businesses in exchange for the cancellati­on of debt. This is the outcome he is hoping Ascendis will achieve, resulting in an investment holding company with smaller stakes in different divisions.

“It is my belief that going forward, Ascendis will end up owning small percentage stakes in the key divisions and once the debt has been settled it will be a much better operationa­l business.”

Clark says the option of Ascendis holding smaller interests in exchange for debt cancellati­on is the most attractive option because it is “better to own a small piece of the pie than no pie at all”.

“The faster you settle this debt issue, the easier and more realistica­lly will Ascendis minority shareholde­rs see some value uplift in the company. When you are paying R1bn a year in finance costs and you’re making about R1.4bn in ebitda [earnings before interest, tax, depreciati­on and amortisati­on], it’s unsustaina­ble.”

Sardi says one of the restructur­ing scenarios that could emerge from negotiatio­ns with Blantyre and L1 was “swapping Europe for more of SA”, which could see Ascendis either exiting European investment­s or significan­tly reducing its interests there, while keeping bigger interests in local divisions.

He says this alternativ­e to having smaller interests in divisions across Europe and SA is being considered because being an investment holding company with lots of small stakes in other divisions often means trading at a discount to net asset value.

Swapping Europe for more of SA would also mean “greater control of our destiny”, with Sardi adding that if the company kept more in Europe, it may battle to get the support of shareholde­rs — of which 65% are institutio­nal — for further funding for expansion opportunit­ies in these markets.

Sardi says the company has been turned around, and now it’s a “question of permanentl­y fixing the balance sheet”.

Meanwhile, Clark says Ascendis shares, which were trading at 48c on Friday, potentiall­y offered value for speculativ­e investors.

“If I was a gambling man and you wanted to put money on black or red in roulette or on an outside horse at Kenilworth, Ascendis at these levels would seem like a good speculativ­e bet — but bear in mind, caveat emptor, buyer beware.”

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