Patheon acquired by JLL Partners: fairness opinion by RBC Capital Markets and Jefferies
Deal terms
Opinion of RBC Capital Markets to the special committee
Discounted cash flow assumptions
Terminal EBITDA multiple sensitivity produced US$9.67-$13.43 per share (WACC 9%-11%, 8.0x-10.0x); perpetuity growth sensitivity produced US$9.15-$13.88 per share (WACC 9%-11%, 2.00%-2.50%). RBC concluded results were consistent with the Share Consideration. Independent Committee noted that at WACC 8%-10% with growth of 1.75%-2.75% values exceeded the consideration, while at 11% WACC with 1.75%-2.00% growth and 12% WACC with 1.75%-2.75% growth values were below the consideration.
Selected precedent transactions (14)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2012-10-29 | Banner Pharmacaps | Patheon | 10.8x EV / LTM EBITDA |
| 2012-10-04 | Metrics | Mayne Pharma | 6.5x EV / LTM EBITDA |
| 2012-08-06 | Aenova | BC Partners | 9.4x EV / LTM EBITDA |
| 2012-05-18 | Ocean Nutrition Canada | Royal DSM N.V. | 9.4x EV / LTM EBITDA |
| 2011-08-19 | Aptuit (Clinical Trials Business) | Catalent Pharma Solutions | 10.1x EV / LTM EBITDA |
| 2011-04-04 | Capsugel | KKR | 11.3x EV / LTM EBITDA |
| 2011-02-24 | Lancaster Laboratories | Eurofins | 8.0x EV / LTM EBITDA |
| 2008-04-30 | BASF (CMO Segment) | Dr. Reddy's Laboratories | 6.2x EV / LTM EBITDA |
| 2007-08-03 | Lipa Pharmaceuticals | CK Life Sciences | 9.6x EV / LTM EBITDA |
| 2007-04-24 | HollisterStier Laboratories | Jubilant Organosys | 11.2x EV / LTM EBITDA |
| 2007-01-25 | Cardinal (Catalent Pharma Solutions) | Blackstone | 14.3x EV / LTM EBITDA |
| — | Althea | Ajinomoto | — |
| — | JHP Pharma | Warburg Pincus | — |
| — | Draxis Health | Jubilant Organosys | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / LTM EBITDA | 6.2x | 9.6x | 14.3x | — | — |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Comparable Transaction Premiums (Canadian minority buy-ins) | 26 Canadian transactions over US$100 million since January 2005 where controlling shareholders acquired publicly traded minority interests; premiums to prior-day closing price ranged from a low of 6% to a high of 166%, mean 27%, median 19%. The US$9.32 Share Consideration represented a 64% premium to the US$5.70 market price on November 18, 2013, above the mean and median. | — |
| Public company trading multiples review | RBC reviewed trading multiples of publicly traded commercial manufacturing outsourcing companies but concluded values implied were below DCF and precedent transaction values, and because public values reflect minority discount rather than en bloc values, did not rely on this methodology. | — |
| Implied transaction multiple | Share Consideration implied EV/LTM EBITDA of 13.1x on 2013 EBITDA of ~US$150 million and 11.0x on Pro Forma 2013 EBITDA of ~US$178 million, consistent with or above precedent transaction multiples (median 9.6x). | — |
RBC entitled to a fee of CDN$750,000 for services already provided; if the Arrangement is consummated RBC receives the balance of fees expected to be approximately US$2.9 million pre-tax (based on CDN$1.00 = US$0.9576 on November 17, 2013). Opinion delivered to the Independent Committee and the Board.
Opinion of Jefferies to the acquirer board
Discounted cash flow assumptions
Based on approximately 149.3 million fully diluted Restricted Voting Shares outstanding as of November 15, 2013.
Selected public companies (10)
Charles River Laboratories International, Inc. · Covance Inc. · ICON plc · PAREXEL International Corporation · Quintiles Transnational Holdings Inc. · Albany Molecular Research, Inc. · Cambrex Corporation · Lonza Group AG · Siegfried Holding AG · WuXi PharmaTech (Cayman) Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / 2013E EBITDA (CRO subset) | — | 12.2x | — | — | — |
| EV / 2014E EBITDA (CRO subset) | — | 11.0x | — | — | — |
| EV / 2013E EBITDA (CMO subset) | — | 10.3x | — | — | — |
| EV / 2014E EBITDA (CMO subset) | — | 9.3x | — | — | — |
| EV / 2013E EBITDA (overall) | — | 11.1x | — | 9.5x–11.5x | $7.74–$10.12 |
| EV / 2014E EBITDA (overall) | — | 10.2x | — | 8.5x–10.5x | $8.02–$10.82 |
Selected precedent transactions (12)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2013-06 | PRA International | KKR & Co. L.P. | — |
| 2011-10 | Pharmaceutical Product Development, Inc. | The Carlyle Group L.P. / Hellman & Friedman LLC | — |
| 2011-05 | PharmaNet Development Group, Inc. | inVentive Health, Inc. | — |
| 2011-05 | Kendle International Inc. | INC Research, LLC / Avista Capital Holdings, L.P. | — |
| 2010-12 | ReSearch Pharmaceutical Services, Inc. | Warburg Pincus, LLC | — |
| 2010-08 | INC Research Inc. | Avista Capital Holdings, L.P. / Teachers' Private Capital | — |
| 2012-12 | Qualicaps Co., Ltd. | Mitsubishi Chemical Holdings Corporation | — |
| 2012-10 | Banner Pharmacaps Inc. | Patheon Inc. | — |
| 2012-08 | Aenova Holding GmbH | BC Partners Limited | — |
| 2011-08 | Aptuit, LLC | Catalent Pharma Solutions, Inc. | — |
| 2011-04 | Capsugel Holdings US, Inc. | KKR & Co. L.P. | — |
| 2011-02 | Lancaster Laboratories, Inc. | Eurofins Scientific SE | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / LTM Revenue (CRO subset) | — | 0.9x | — | — | — |
| EV / LTM EBITDA (CRO subset) | — | 11.8x | — | — | — |
| EV / LTM Revenue (CMO subset) | — | 2.5x | — | — | — |
| EV / LTM EBITDA (CMO subset) | — | 10.2x | — | — | — |
| EV / LTM Revenue (overall) | — | 2.1x | — | 1.8x–2.3x | $8.52–$11.98 |
| EV / LTM EBITDA (overall) | — | 11.3x | — | 10.0x–12.0x | $8.04–$10.37 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Transaction Overview / Premiums | US$9.32 (CDN$9.75) implied equity value of ~US$1.39 billion and enterprise value of ~US$1.97 billion (net debt ~US$576.2 million); premiums of 63.9% to Nov 15, 2013 close (CDN$5.95), 68.6% to 30-day VWAP, 56.9% to 60-day VWAP, 59.2% to 90-day VWAP, 115.4% to one-year VWAP, 43.6% to the 52-week high close (CDN$6.79) and 209.5% to the 52-week low close (CDN$3.15). | — |
| Premiums Paid Analysis (informational only) | 41 US/Canadian healthcare M&A transactions announced since January 1, 2009 with cash consideration of US$500 million to US$3 billion; 1-day premiums ranged from (8.6%) to 163.4% (median 34.9%, mean 49.2%) and 4-week premiums from (4.7%) to 301.5% (median 42.6%, mean 58.6%). Applying the 25th-75th percentile range to the November 15, 2013 closing price implied US$6.81 to US$9.98 per share. Solely informational, not part of the fairness determination. | $6.81–$9.98 |
Pursuant to a November 5, 2013 engagement agreement, JLL Associates agreed to pay Jefferies US$1 million payable upon delivery of its opinion. Jefferies and an affiliate are also providing financing services in connection with the Transaction for additional compensation.
Management projections
| Projection year | Year 1 | Year 2 | Year 3 | Year 4 | CAGR |
|---|---|---|---|---|---|
| Revenue | $1.2B | $1.3B | $1.4B | $1.5B | 6.3% |
| Revenue growth | 6.5% | 6.3% | 6.3% | 6.3% | |
| EBITDA | $230M | $257M | $287M | $311M | 10.6% |
| EBITDA growth | 12.7% | 11.7% | 11.7% | 8.4% | |
| EBITDA margin | 19% | 20% | 21% | 21% | |
| Implied EV / EBITDA | 11.3x | 10.1x | 9.1x | 8.4x |
Year-1 growth is against LTM at announcement ($1.1B revenue, $204M EBITDA); later years are year over year.
Management prepared projections in September 2013 at the request of the Independent Committee covering fiscal years 2013 through 2017 (fiscal year ends October 31). Revenue was projected to grow from US$1,054.7 million in FY2013E (pro forma adjusted US$1,056.6 million) to US$1,376.4 million in FY2017E, with Adjusted EBITDA rising from US$149.6 million (pro forma US$177.8 million) in FY2013E to US$286.8 million in FY2017E (20.8% margin). RBC extrapolated an additional year (FY2018E: revenue US$1,462 million, EBITDA US$311 million, unlevered free cash flow US$185 million) to form the "Financial Forecast" used in its DCF; unlevered free cash flow ranged from US$88 million in FY2014E to US$185 million in FY2018E.
Process notes
Other Pharmaceutical Services fairness opinions
- Covance / Laboratory Corporation of America 2014 · 12.6x EV/EBITDA
- eResearch Technology / Genstar Capital 2012 · 7.7x EV/EBITDA
- Pharmaceutical Product Development / Hellman & Friedman and The Carlyle Group 2011 · 11.4x EV/EBITDA
- Kendle International / INC Research Holdings 2011 · 9.9x EV/EBITDA
- Quintiles / IMS Health 2016 · 10.8x EV/EBITDA
- IMS Health / Quintiles 2016 · 13.5x EV/EBITDA
All Pharmaceutical Services opinions → · RBC Capital Markets opinions · Jefferies opinions