Stada's buyout saga

With more than 6 months in the process, a highly contested auction, failed bid and giving in to a hedge fund’s overblown demands, Stada’s leveraged buyout is almost done.

Stada Arneimittel AG is the German generic drug maker with €2.1bn in revenues for 2016 and €375m EBITDA. The company engages in the development and marketing of active pharmaceutical ingredients as well as it is also involved in the wholesale activities in the pharmaceutical market. It offers a broad portfolio of high-quality, low cost generics combined with a portfolio of well-established branded products. Some of its most recognized products include: Grippostad or Aqualor. This year it attracted a lot media attention due to a record deal size as well as to a lengthy and problematic sales process.

The bidding process for Stada started this February with two major private equity houses on the opposite sites: Advent International and Cinven. Later on, in order to exert a greater buying power, they teamed up in two consortia with Permira and Bain Capital respectively. Finally, after two months of highly competitive sales process, Cinven with Bain Capital secured management’s support for €4.1bn buyout by offering €65.28 plus a dividend of €0.72 per Stada share, making it the largest European public company buyout in 4 years.

Stada represented a highly probable buyout target earlier as it was one of the last remaining independent generics manufacturer, operating in the industry with significant barriers to entry. On top of that, it manufactures its own brand products – segment which usually yields higher margins, improving cash generation, and enabling to service the potential new debt.

The bidding process ended in the middle of April, with Stada’s management supporting the proposed offer on the grounds of financial attractiveness and strategic vision. Then the buyout group made a formal offer for the shares with a deadline for a tender on 8th June and required threshold of 75% of acceptance. However, the offer turned out to be unsuccessful and the consortium sought a two-week extension with this time a lower threshold of 67.5%. Once again, Cinven and Bain Capital fell short of the required shareholder’s support, theoretically killing the deal, as in this situation the German takeover law requires a potential investor to wait 12 months before working with management on the new offer. The second failure put a consortium into much more trouble, as it had already secured financing for the deal including EUR 3.17bn in senior debt instruments and was thus obliged to pay interest.

In order to try to save the deal, the private equity consortium applied to the BaFin (German Financial Supervisory Authority) for the exemption from the above rule presenting the new improved public takeover offer. Stada’s management expressed its support for the renewed offer of EUR 66.25 per share and much lower 63% acceptance threshold, as it believed exemption from the rule is in the best interest of the company and its stakeholders.

Fortunately, BaFin granted an exemption and buyout group could propose shareholders the revised offer.

If it were not enough hurdles faced by Cinven and Bain Capital, Elliott Management (highly litigious US hedge fund) has built a significant stake (13.2% or 15.2% with stock options) in Stada at the turn of July. The hedge fund promised to support the deal but demanded €74.40 per share – representing [X]% premium to Stada's undisturbed share price.

Finally, on 18th August the buyout group announced that they have reached the minimum threshold of acceptance and thus secured the deal. However, under the German takeover rules the investor needs at least 75% of shares in order to control company's cashflow via a so-called domination and profit and loss transfer agreement. To achieve this,Cinven and Bain had to win Elliott Management's support. With many complains on overblow valuation, the buyout consortium finally gave in to hedge fund's demand and offered sweetened €74.40 per share to the minority shareholders. Closing of the transaction is expected in the middle of September.

When it comes to the financial terms of the deal the enterprise value (EV) will probably reach €5.42bn including €1.15 in Net Debt. This would result in 13.6x EV/ LTM EBITDA and 2.4x EV/ LTM Revenues multiples. The buyout consortium will use €3.18bn of debt to finance the transaction, making it the largest leveraged buyout of the public company in Europe in 4 years. Under the terms of the transaction, debt will constitute of almost 60% of the new capital structure.

Cinven and Bain Capital will aim to further develop company through its global network, streamline its product portfolio as well as increase internationalisation of its branded products. The buyout group’s representatives reassured their full commitment to supporting company’s new strategy – “Stada Plus”, which main objectives include higher growth rates and improved EBITDA margin. Stada aims to achieve it by e.g., expanding in the area of biosimilars - products which are almost a copy of the original drug, manufactured when its patent expires. Barclays acted as the financial advisor to Bain Capital, while Stada was advised by Perella Weinberg Partners, Deutsche Bank and Evercore.