Patheon NV acquired by Thermo Fisher Scientific: fairness opinion by Morgan Stanley
Announced May 15, 2017 · Tender offer · All cash ·
DEFM14A filed June 27, 2017
Enterprise value
$7.4B
EV / LTM EBITDA
16.4x
EBITDA $450M · 22% margin
EV / LTM revenue
3.66x
revenue $2.0B
DCF discount rate
7.7%–8.9%
Perpetuity growth
Deal terms
ConsiderationAll cash
Price per share$35.00
Premium35.0%
Premium basisclosing trading price of $26.00 per Share on May 12, 2017, the last full trading day prior to announcement
StructureTender offer
Termination fee$203M
Reverse termination fee—
Go-shopNone
Outside date—
FilingDEFM14A · EDGAR index
Implied value per share by method vs. $35.00 offer
Selected companies — AV / CY2017E Adjusted EBITDA $20.50 – $29.50
Selected companies — AV / CY2018E Adjusted EBITDA $20.25 – $30.75
Precedent transactions — AV / LTM EBITDA (LTM as of April 30, 2017) $15.00 – $28.25
Discounted cash flow $31.00 – $42.00
Discounted Equity Value Analysis $27.50 – $38.25
Precedent Premia (for reference only) $31.25 – $36.50
Equity Research Analysts' Price Targets (for reference only) $28.00 – $33.00
Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.
Opinion of Morgan Stanley to the target board
Delivered May 14, 2017 · Fee $33.0M ($31.0M contingent on closing), $2.0M on delivery of the opinion
Discounted cash flow assumptions
Discount rate7.7%–8.9%
BasisPatheon's estimated weighted average cost of capital (WACC)
Terminal valuePerpetuity growth
Perpetuity growth2.5%–3.5%
Exit multiple—
Projection periodCY2017-CY2021
Projections usedManagement Projections (with extrapolations); stock-based compensation treated as a cash expense
Implied value per share$31.00–$42.00
Sensitivity analysis: 8.9% WACC with 2.5% perpetuity growth implied $28.00 per Share; 7.7% WACC with 3.5% perpetuity growth implied $47.50 per Share. Discounted to May 12, 2017.
Selected public companies (5)
Albany Molecular Research, Inc. (unaffected basis as of April 6, 2017) · Cambrex Corporation · Catalent, Inc. · Lonza Group AG · West Pharmaceutical Services, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| AV / CY2017E Adjusted EBITDA | 9.3x | 13.0x | 20.5x | 11.0x–14.0x | $20.50–$29.50 |
| AV / CY2018E Adjusted EBITDA | 8.3x | 11.9x | 17.8x | 9.5x–12.5x | $20.25–$30.75 |
Selected precedent transactions (22)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2016-12-20 | CMC Biologics A/S | Asahi Glass Co., Ltd. | — |
| 2016-12-15 | Capsugel S.A. | Lonza Group AG | — |
| 2016-11-28 | Unither Pharmaceuticals Inc. | Ardian | — |
| 2016-06-01 | PCI Pharma Services | Partners Group Holding AG | — |
| 2016-05-05 | Prime European Therapeuticals S.p.A. | Albany Molecular Research, Inc. | — |
| 2014-09-30 | Aesica Holdco Limited | Consort Medical plc | — |
| 2014-08-27 | Gallus BioPharmaceuticals, LLC | DPx Holdings B.V. | — |
| 2014-07-28 | Penn Pharmaceutical Services Limited | Packaging Coordinators, Inc. | — |
| 2013-11-19 | Patheon Inc. | JLL Partners, Inc. / Koninklijke DSM N.V. | — |
| 2013-10-02 | Acino Holding AG | Nordic Capital / Avista Capital Partners | — |
| 2013-09-06 | Haupt Pharma AG | Aenova Group GmbH | — |
| 2013-07-29 | Santa Cruz Nutritionals, Inc. | RoundTable Healthcare Partners | — |
| 2012-12-24 | Qualicaps Co., Ltd. | Mitsubishi Chemical Holdings Corporation | — |
| 2012-10-29 | Banner Pharmacaps Inc. | Patheon Inc. | — |
| 2012-08-06 | Aenova Group GmbH | BC Partners | — |
| 2011-08-22 | Clinical Trial Supplies business of Aptuit LLC | Catalent Pharma Solutions, Inc. | — |
| 2011-05-01 | Elan Drug Technologies, the drug formulation and manufacturing business unit of Elan Corporation, plc | Alkermes, Inc. | — |
| 2011-04-04 | Capsugel S.A. | KKR & Co LP | — |
| 2008-03-01 | DRAXIS Health Inc. | Jubilant Organosys Ltd. | — |
| 2008-02-01 | Active Pharmaceutical Ingredients, a business unit of Alpharma Inc. | 3i Group plc | — |
| 2007-01-25 | Pharmaceutical Technologies and Services segment of Cardinal Health, Inc. | The Blackstone Group L.P. | — |
| 2006-10-30 | Cambrex Corporation | Lonza Group AG | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| AV / LTM EBITDA (LTM as of April 30, 2017) | — | — | — | 10.3x–15.1x | $15.00–$28.25 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Discounted Equity Value Analysis | Applied a selected range of AV / NTM EBITDA multiples to estimated NTM EBITDA as of October 31, 2018, subtracted projected net debt as of October 31, 2018, and discounted to May 12, 2017 at a cost of equity range of 9.8% to 11.7%. | $27.50–$38.25 |
| Precedent Premia (for reference only) | Reviewed premia paid in 719 all-cash M&A transactions prior to March 31, 2017 with transaction value of $1 billion or more; applied a representative premium range of 20% to 40% to the May 12, 2017 closing price of $26.00. | $31.25–$36.50 |
| Historical Trading Range (for reference only) | Reviewed historical trading range of Shares from the July 21, 2016 IPO to May 12, 2017; closing price on May 12, 2017 was $26.00, so the $35.00 Offer Consideration represented an approximately 35% premium to that close and approximately 33% premium to the 30-day VWAP. | — |
| Equity Research Analysts' Price Targets (for reference only) | Reviewed undiscounted future public market trading price targets published by ten equity research analysts as of May 12, 2017. | $28.00–$33.00 |
Approximately $31 million for financial advisory services, all contingent upon closing of the Offer, plus a $2 million opinion fee not contingent on closing but creditable against the advisory fee if the Offer is consummated. Engagement letter dated May 8, 2017.
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Management projections
| Projection year | Year 1 | Year 2 | Year 3 | Year 4 | CAGR |
|---|---|---|---|---|---|
| Revenue | $2.2B | $2.4B | $2.6B | $2.8B | 8.6% |
| Revenue growth | 8.0% | 8.5% | 8.6% | 8.6% | |
| EBITDA | $519M | $596M | $676M | $759M | 13.5% |
| EBITDA growth | 15.3% | 14.8% | 13.4% | 12.3% | |
| EBITDA margin | 24% | 25% | 26% | 27% | |
| Implied EV / EBITDA | 14.2x | 12.3x | 10.9x | 9.7x |
Year-1 growth is against LTM at announcement ($2.0B revenue, $450M EBITDA); later years are year over year.
Morgan Stanley relied on financial projections prepared by Patheon management (the "Management Projections"), which supported estimates of calendar year 2017 and 2018 Adjusted EBITDA, NTM EBITDA and projected net debt as of October 31, 2018, and unlevered free cash flows for calendar years 2017 through 2021. Morgan Stanley's unlevered free cash flow calculation differed from the Management Projections by treating stock-based compensation as a cash expense. No specific revenue or EBITDA dollar figures were disclosed in the sliced sections.
Process notes
Dutch tender offer (Purchase Agreement) by Thermo Fisher (CN) Luxembourg S.a r.l. with a possible Post-Offer Reorganization (Asset Sale and liquidation) requiring shareholder resolutions at an Extraordinary General Meeting. A Transaction Committee of the Patheon Board oversaw the process; a competing bidder ('Party A') participated but did not make an actionable proposal. Majority Shareholders (affiliates of JLL and DSM), holding approximately 75% of outstanding Shares, entered into Tender and Support Agreements, including Thermo Fisher's right to buy their Shares at the Offer Consideration if Patheon terminated for a Superior Proposal. Patheon sought $35.50 per share but Thermo Fisher would not exceed $35.00. Morgan Stanley disclosed prior two-year fees of ~$6 million from Thermo Fisher and ~$8 million from Patheon.
Other Pharmaceutical Services fairness opinions
- Albany Molecular Research / Carlyle Group / GTCR 2017 · 11.5x EV/EBITDA
- Parexel International / Pamplona Capital Management 2017 · 13.9x EV/EBITDA
- Juniper Pharmaceuticals / Catalent 2018 · 9.9x EV/EBITDA
- Quintiles / IMS Health 2016 · 10.8x EV/EBITDA
- IMS Health / Quintiles 2016 · 13.5x EV/EBITDA
- Cambrex / Permira Funds 2019 · 14.5x EV/EBITDA
All Pharmaceutical Services opinions → · Morgan Stanley opinions