Price Tag

Monday, 18th November 2013 09:55 - by Moosh

You may know how it works...

You wake up, read the regulatory news releases to see if any companies in your portfolio have said anything useful before debating whether it was really worth getting out of bed in the first place; but one day, you go through the same routine and something different happens – one of your companies gets a takeover approach. At which point, lots of clapping like a seal and jumping up and down feeling like you’re the world’s best investor happens, while knocking over a half-drunk mug of tea and wondering whether you are actually awake or if it’s just a lovely dream.

After cleaning the spilt tea which confirms the fact that, yes, you are indeed awake and the takeover approach is very real, you wonder if the takeover price (assuming it’s an all cash takeover) is any good. After being invested in a few companies which have been taken over, some were taken over at a premium to the pre-takeover share price, while others have been taken over at a lower price than the pre-takeover closing price. When it comes to an offer price though, I have wondered how the acquirers hone in on a specific price – is it a case of randomly picking a number out of the air which is close to the latest market price for the company or is there a bit more refinement in the process? As an independent private investor, I want to be sure that if I am investing in a company which may get taken over in the future, that I am not initially buying in at a price which an acquirer may never match or even pay more than. My first thoughts here are to check the net asset value per share of the company and use this as a starting point in terms of a minimum price which may/should be offered based on assets alone, assuming the company has net assets rather than net liabilities.

My next line of thought questions whether history can guide me in the future – what acquisitions have been made recently and were there fundamental aspects which tipped the balance when it came to deciding a price tag for the acquisition? It may not be that ‘one size fits all’ when it comes to figuring out a takeover price for companies from different sectors, so for the purpose of this blog post I will focus on the pharmaceutical sector.

I was invested in a pharmaceutical company called Prostrakan when it was listed on the stock market until it was taken over by Kyowa Hakko Kinn in 2011. The offer package was ~£292m and at the time Prostrakan had just become profitable with a turnover of £100.2m; the offer came at a price which was ~2.9 times the annual turnover, and per share, the offer price was at a premium to the pre-takeover share price (therefore larger than the pre-offer market capitalisation).¹

However, not all companies to be taken over are listed on a stock market so how are they valued if there is no idea of how the market values it? A company which specialises in contract research for the pharmaceutical industry which I am a long term investor of is Cyprotex Plc (TIDM: CRX), which became an acquirer in 2010 when they took over Apredica in Watertown, Massachusetts. The total package offered by Cyprotex was £2.68m, which was ~2.55 times the latest total annual revenue and 26+ times the EBITDA (earnings before interest, tax, depreciation and amortization).² Earlier this year, Bionostics was taken over by Techne for $104m cash, based on an EBITDA of ~$9.4m, which makes the offer to be about 11 times the EBITDA. Revenue for the latest full financial year was ~$29.3m, so the offer was about 3.5 times the total revenue.³ Most recently, Molecular Profiles, a private company spun out from the University of Nottingham was taken over by Columbia Laboratories (NASDAQ: CBRX) for a total package of $25m, with the price tag being about 10-11 times the projected full year EBITDA and/or 2.77 times the total revenue for the previous financial year, alongside solid organic growth.⁴

Four examples may not be enough for definitive answers to my price tag quandary but initially there does seem to be consistency with respect to how an offer price is finely tuned (at least in the pharmaceutical sector) in relation to the fundamentals of the company – as a rough guide I would be looking for an offer price which was about 10-11 times the EBITDA and/or about 2.5-3.5 times the total annual revenue. Now if faced with a takeover offer price, I can figure out for myself if it is reasonable or not.

References

1. http://www.business7.co.uk/business-news/company-results-and-forecasts/2011/03/17/prostrakan-reaches-100m-turnover-106408-22995881/
2. http://www.cyprotex.com/news/390/
3. http://www.genengnews.com/gen-news-highlights/techne-buys-bionostics-for-104m/81248493/
4. http://www.molprofiles.co.uk/about-us/news/columbia-laboratories-acquires-molecular-profiles-ltd/

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.