Sasha Planting | 2013-03-22 15:28:52
Unsolicited Bidvest offer may cause headaches for Adcock Ingram.
CAPE TOWN - Bidvest, the diversified industrials company has been likened to South Africa’s own Berkshire Hathaway, and its CEO Brian Joffe to legendary investor Warren Buffet.
Certainly Joffe seems to have a gift for nosing out good companies that have potential to deliver healthy returns, that are trading at or below their net asset value and for not over-paying for them.
Most recently the company offered to buy out shareholders in Amalgamated Appliance Holdings. It offered R3.50/share for the distributor and retailer of household appliances, a 10% premium on the closing price at the time of the offer. At the same time it walked away from a deal to buy Brandcorp, a distributor of gardening tools and luggage, because the asking price was too high.
The company remains acquisitive and has a strategy to bulk up its Industrials business, the smallest of the ten divisions that comprise Bidvest SA. Its turnover for the six months to December was R777m, small potatoes when compared with the Freight and Automotive divisions which turned over R11.9bn and R10.4bn respectively.
“I think the deal flow in the last month or two has stepped up a lot,” CEO Brian Joffe told Moneyweb at the time. “We are keen to make acquisitions as we go, but also very careful to be sure that what we buy doesn’t become more of a hindrance than an advantage. We are quite conservative and quite fussy as to what we get and what we pay.”
That said, Bidvest caught the market, and Adcock Ingram (AI), by surprise with its unsolicited offer to buy a 60% stake in the company. Adcock Ingram CEO Jonathon Louw is currently overseas. Adcock shareholders are being asked to relinquish 60% of their shareholding in exchange for a combination of cash and Bidvest shares. Bidvest is offering R65 per AI share as well as one Bidvest share for every four AI shares in a 50/50 ratio. Adcock shares jumped from R56.20 to R61.70 on the news.
There is no premium inherent in this bid, which is a little unusual considering it is bidding for control of the company. “By my valuation Adcock Ingram is worth R63.10,” says Alec Abraham, healthcare analyst at Vunani Securities. “Effectively Bidvest is offering shareholders R61.00 a share, based on the current price.”
Adcock Ingram has faced an uphill battle since the company was unbundled from Tiger Brands in 2008, and in recent years has disappointed the market with lacklustre returns and a seeming lack of focus. “Tiger Brands sucked this business dry,” says Abraham. “They left it with no distribution infrastructure; factories that needed capital investment and they took a chunk of the best brands which left it with no critical mass. They have been trying to regain competitive advantage ever since.”
As a result the market is concerned that the company is drifting. This is despite recent initiatives to unlock growth opportunities – such as last year’s acquisition of Indian pharmaceutical company Cosme Farma. Its P:E of 14.5x compared with that of its bigger and more energetic competitor Aspen on a P:E of 26x seems to reflect this.
Thus it’s possible that disillusioned shareholders may accept the current bid in exchange for the value that Bidvest is reputed to bring to a business. “Adcock has stumbled from one minor mis-step to another,” says Vestact CEO Paul Theron. On the other hand Bidvest appears to be able to do no wrong. “It is held in high regard by the investment community and its CEO, Brian Joffe has a reputation as an excellent manager,” he adds.
The offer marks Bidvest’s first foray into the high growth pharmaceutical sector. Its investments in sectors like financial services, office equipment and travel do not speak to obvious strengths in manufacturing and marketing, which are critical in the highly competitive pharmaceutical market.
However these days the pharmaceutical market is about logistics, delivery and fulfilment, says Theron.
Adcock’s biggest investor is the PIC, which holds a 12% stake in the company, followed by Blue Falcon Trading with 10%. Beyond this the next ten biggest shareholders hold stakes ranging from 3% to 6%. The absence of a controlling shareholder makes the company vulnerable to this type of unsolicited bid. “With a market cap of R80bn, a R6bn deal like this will not cause much stress,” says Theron.