Advancement of the Adcock Ingram/ CFR R12.6bn deal

The merger between local pharmaceutical giant Adcock Ingram Holdings and Chile’s CFR Pharmaceuticals has moved a step closer to implementation after the groups announced yesterday that they have concluded a transaction implementation agreement.

The transaction is however still subject to a raft of regulatory approvals. The big question is will this proposition attract the kind of protest noise experienced when US retailer Walmart moved to acquire local operator Massmart? The sponsors of this deal seem to have learnt from past transactions and have wrapped their proposition in a language that seeks to address local interests.

CFR has proposed to acquire 100% of the ordinary shares of Adcock Ingram for about R12.6 billlion in a deal supported by the Adcock Ingram board.

A minimum of 51% and maximum of 64.3% of the proposed offer price would be settled in cash and a minimum of 35.7% and maximum of 49% in new CFR shares. CFR plans to seek a secondary listing on the JSE in a first of its kind transaction in South Africa.

The proposed offer price of R73.51 per ordinary share represents a 31% premium to the unaffected Adcock Ingram share price of R56.20 on 20 March 2013. The proposed offer price is currently worth R75.92 per ordinary share based on the closing price of CFR shares on the Santiago Stock Exchange on 10 September 2013.

The statement added that the companies the combination of Adcock Ingram and CFR would create a substantial and uniquely diversified emerging markets multinational, targeting patients across Latin America, Africa, South East Asia and India. The emerging markets pharmaceutical leader would have combined revenues of approximately R12.1 billion (approximately US$1.3 billion) and an asset base of approximately R215 billion (approximately US$21.5 billion).

The potential offer would represent foreign direct investment for South Africa of more than R12.6 billion and, through the proposed secondary listing of CFR on the JSE, would enhance South Africa’s profile as an investment destination.

CFR and Adcock Ingram have completed reciprocal due diligence of each other’s businesses. The potential offer, however, remains subject to certain pre-conditions. Adcock Ingram’s Independent Board is of the view that the CFR proposal is the most favourable proposal received to date. Subject to the fulfilment of the pre-conditions and receipt of a favourable independent expert opinion, the Adcock Ingram Independent Board intends to recommend that its shareholders vote in favour of the proposed transaction.

Chairman of Adcock Ingram Dr Khotso Mokhele said “We have reached a significant milestone for both the Independent Board’s process and our discussions with CFR, which are now far advanced. The CFR proposal remains the most favourable received to date and is evidence of our commitment to maximise value for our shareholders. It is superior in terms of proposed offer price, conditionality, strategic rationale, future value creation potential and execution risk. Importantly, it will ensure that South Africa remains core to the merged company thus delivering value not only to our shareholders, but also to our employees and South Africa at large. CFR also understands the importance and value of empowerment.”

Adcock Ingram would be a central part of the combined business, generating approximately 40% of group revenues. Synergies stand to be unlocked through complementary product portfolios, business structures, geographical presence and manufacturing footprints. The consolidated manufacturing footprints will drive efficiencies and cost reductions, while also generating further investment into Adcock’s factories. This is expected to have a positive effect on long-term employment and will drive exports from South Africa, in line with the South African government’s strategic objectives for the country, as well as CFR’s commitment to preserve and grow jobs within Adcock Ingram.

CFR’s CEO, Alejandro Weinstein said “We have committed to growing Adcock’s business and plan to transfer a number of products to Adcock’s South African and Indian factories, which would help drive job creation and exports. Together, our combined businesses are expected to generate significant revenue and cost synergies, with an estimated net present value of approximately R4.4 billion. We would be uniquely positioned to capitalise on attractive market opportunities in South America, Africa and South East Asia.”

CFR has concluded non-binding memoranda of understanding with Adcock Ingram’s BEE shareholders, comprising both strategic BEE shareholders and qualifying staff, to remain invested in the company. Participants in each of Adcock’s employee incentive schemes would also benefit from either the acceleration of their share options or an equitable offer from CFR.

In addition, CFR has signed a non-binding memorandum of understanding with Baxter, the multinational partner for Adcock Ingram’s hospital products division, to secure existing licensing, distribution and supply arrangements. Subject to final agreement, Baxter will irrevocably undertake to consent to the change in shareholding should the transaction be implemented.


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