INTRODUCTION
On the 20th of July 2023, shareholders of Dechra Pharmaceuticals, a UK-based veterinary pharmaceutical company, approved the recommended cash acquisition by Freya Bidco Limited, a vehicle indirectly owned by private equity firm EQT.
The £4.5bn deal has been one of the largest leveraged buyouts to take place in Europe this year, occurring during a time when dealmaking has considerably slowed due to the high interest rates required by banks.
Meanwhile, the offer comes at a challenging time for the animal health market. In the US and Europe, wholesalers that buy Dechra’s medicinal products have been cutting the amount of stock they hold, which has hit the company’s profit margins.
By this deal, EQT has planned to increase additional investment in Dechra’s innovative pipeline and active support for global expansion initiatives. The transaction is expected to complete by end of 2023 or early in 2024.
COMPANY OVERVIEW
Dechra
Dechra was formed 26 years ago and is listed on the Premium Segment of the London Stock Exchange’s Main Market. Dechra generated revenues in the last year for £681.8m (US$838.1m), growing for 13.8% on annual basis.
Their expertise is in the development, manufacture, marketing, and sales of high-quality products for veterinarians worldwide. Its products can be largely split into four main categories – Companion Animal Products, Food producing Animal Products, Equine, and Nutrition. The company is a global leader in veterinary endocrinology and topical dermatology, have a broad portfolio of analgesia, anaesthetics, and products for the treatment of pain, and they are also recognised as innovators in other specialisations such as the treatment of equine lameness, nutrition, and differentiated generics.
Petcare businesses emerged as one of the biggest winners from the Covid-19 pandemic as lockdowns prompted more people to stay at home and spend more money on their pets.
Elizabeth Alison Platt, Dechra’s chair, said that the offer was “a compelling opportunity for shareholders to realise, in cash and with certainty, Dechra’s potential for future value creation”.
Freya Bidco
Bidco is a newly formed vehicle, to be indirectly owned by EQT Funds (74%) and Luxinva (26%), a wholly owned subsidiary of the Abu Dhabi Investment Authority (ADIA) managed by the Private Equities department of ADIA. Bidco was formed for the purposes of the Acquisition.
Freya Bidco (EQT)
EQT is a purpose-driven global investment organization focused on active ownership strategies. As of 2022, EQT’s fee-generating assets under management (FAUM) are €113b (US$123b), and total asset under management (AUM) are €210b (US$228b), the firm is ranked the third largest private equity fund worldwide based on raised funds. EQT annual revenue for 2022 was about €1.6b (US$1.74b), a 5% decrease from 2021.
“As medical innovation accelerates and pet ownership increases, the animal health sector is expected to benefit from long-term growth, and we believe Dechra is well positioned for this significant opportunity”, commented Anthony Santospirito, partner of EQT.
Freya Bidco (Luxinva)
Luxinva is a wholly owned indirect subsidiary of ADIA, managed by ADIA PED, an investment department of ADIA. ADIA is a long term, value driven investor, mandated to build value in a systematic and structured manner. ADIA’s purpose is to receive funds of the Government of Abu Dhabi allocated for investment and to invest those funds for the benefit of the Emirate of Abu Dhabi. ADIA manages a substantial global diversified portfolio of investments, with assets under management more than US$100b of which ADIA PED represents between 7-12%.
DEAL-SPECIFIC INDUSTRY OVERVIEW
According to a survey by investment bank Jefferies, in the upcoming year, M&A activity in the global healthcare industry is expected to continue to rise, with healthcare corporations leading the way over private equity. Of the 600 senior industry professionals surveyed, 68% predicted a rise in healthcare agreements by 2024 and that 60% of these acquisitions will be driven by companies in the healthcare industry. Overall, M&A activity across industries has declined from a peak in 2021 due to the impact of rising interest rates, geopolitical tensions, and recessions affecting financial markets—deals in the current year have decreased by 23% compared to the corresponding period last year, amounting to $2.6 trillion.
Despite the general climate, M&A transactions in the healthcare sector have increased by 22% to $341 billion this year. Private equity investors are increasingly optimistic about Europe as a value opportunity for 2024. However, healthcare executives remain skeptical about IPOs as a primary source for transactions in the upcoming year, with only 6% of respondents considering IPOs as the most dominant deal type for 2024.
On EQT’s side, EQT sees Dechra as a leading company in the animal health pharmaceuticals market, poised for long-term growth due to positive demographic trends, increasing pet ownership, medical innovation, and a growing focus on animal care. EQT believes it can support Dechra’s growth through its established capabilities developed from previous investments in the animal health value chain. Bidco, EQT’s vehicle, aims to assist Dechra’s management in accelerating long-term growth by providing additional capital, expertise, and resources. They believe that operating as a private company will better enable Dechra to unlock its growth potential, allowing for increased investment in innovation, global expansion, and pursuit of inorganic opportunities. EQT will also expand its footprint in the pet sector by this deal since the fund already owns the UK vet clinic chain IVC Evidensia and is currently aiming to acquire Vetpartners.
On Dechra’s side, the board recognizes EQT and ADIA as highly experienced investors with a robust understanding of the sector. This acknowledgment is seen as a means to strengthen the company’s legacy and expedite its growth. Furthermore, according to the board, the proposal aligns with the best interests of all stakeholders, offering shareholders a compelling opportunity to realize Dechra’s potential for future value creation – in cash and with certainty.
DEAL STRUCTURE
On 26 June 2023, Dechra has published scheme document. Under the terms of the acquisition, each Dechra shareholder is set to receive 3,875 pence in cash per share, valuing the company’s equity value at approximately £ 4,459 million on a fully diluted basis. This bid implies an enterprise value of £4,882 million and a multiple of approximately 25.9 times Dechra’s EBITDA for the twelve months ended 31 December 2022 of £188 million. The deal has represented a substantial premium, ranging from 38% to 49%, over various volume-weighted average prices for the six-month, three-month, and one-month periods leading up to April 12, 2023.
Equity commitments for the investment vehicles managed by EQT Fund Management S.à r.l. (“EFMS”) will come from equity co-investors in EFMS-managed investment vehicles (referred to as “Initial Equity Co-Investors”). If there are additional syndications of the funding commitments from EQT Funds or Luxinva before the Scheme becomes effective, Bidco will make an announcement through a Regulatory Information Service.
EFMS has accepted further subscriptions from certain investors to subscribe for interests in a Co-Investment Vehicle, through which such investors will hold minority indirect interests in Bidco.
New Further Equity Co-Investors have invested to the Co-Investment Vehicles total, in the aggregate, £97million. Regarding to the £825million from the Initial Equity Co-Investors and the £441million from the Further Equity Co-Investors, the maximum potential economic indirect interest of the Co-Investment Vehicles in Bidco is approximately 35.6 per cent.
Sources: Mergermarket, Dechra, Ft, EqtGroup, London Stock Exchange, Reuters, Investgate
Authors: Esme Ding, Federico Manera, Aahana Mishra, Mattia Verde
Bocconi Students M&A Circle 