European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

<ul>
<li>Activist investors are pushing for an up to 30% increase over the SEK106/share offer price. Already in the second extension of offer period, only 0.51% of shares has been tendered.</li>
<li>PMI has a strong balance sheet, which combined with stronger results from both companies and FX favorable moves, would allow for that 30% premium (proforma 3.0x net leverage).</li>
<li>Gross spread is +4.1%. It seems difficult that PMI could succeed without sweetening the offer price, therefore I'd be long Swedish Match. The bidding contest for Vectura shows a precedent.</li>
</ul>


Activist investors are pushing for an up to 30% increase over the SEK106/share offer price. Already in the second extension of offer period, only 0.51% of shares has been tendered.
PMI has a strong balance sheet, which combined with stronger results from both companies and FX favorable moves, would allow for that 30% premium (proforma 3.0x net leverage).
Gross spread is +4.1%. It seems difficult that PMI could succeed without sweetening the offer price, therefore I'd be long Swedish Match. The bidding contest for Vectura shows a precedent.


Philip Morris/​Swedish Match: The Case for an Offer Sweetening

<ul>
<li>
<a href="https://www.smartkarma.com/entities/clinigen-group-plc" target="_blank" data-smartkarma-citation="entities:21734:1" rel="noopener">Clinigen (CLIN LN)</a> was considered a takeover candidate (Elliot, 10.67% stake, was pushing for change). The offer takes advantage of a June profit warning. The market expects a sweetened bid.</li>
<li>The offer price represents 41% premium and a deal value of £1,177.63 (£1.2 billion as reported) and EV of £1,513 million, 12.3x EV/Fwd EBITDA and 16.2x Fwd P/E.</li>
<li>My 945p TP (blended average of DCF and comps-based 12.4x EV/Fwd EBITDA) represents a 6% upside to the offer price, including final dividend. <strong>Long CLIN LN</strong>.</li>
</ul>



Clinigen (CLIN LN) was considered a takeover candidate (Elliot, 10.67% stake, was pushing for change). The offer takes advantage of a June profit warning. The market expects a sweetened bid.
The offer price represents 41% premium and a deal value of £1,177.63 (£1.2 billion as reported) and EV of £1,513 million, 12.3x EV/Fwd EBITDA and 16.2x Fwd P/E.
My 945p TP (blended average of DCF and comps-based 12.4x EV/Fwd EBITDA) represents a 6% upside to the offer price, including final dividend. Long CLIN LN.


<p>At the awaited auction for <a href="https://www.smartkarma.com/entities/wm-morrison-supermarkets-plc" target="_blank" data-smartkarma-citation="entities:22052:1" rel="noopener">Wm Morrison Supermarkets (MRW LN)</a>, CD&amp;R increased its bid to <strong>287p</strong> against a bid of 286p made by Fortress. CD&amp;R took its prey. Fortress, which had preemptively struck (<a href="https://www.smartkarma.com/insights/fortress-morrisons-272p-pre-emptive-strike" target="_blank" data-smartkarma-citation="insights:55791" rel="noopener">Fortress/Morrisons: 272p Pre-Emptive Strike</a>) saved face and CD&amp;R won by increasing its stretched offer by just 0.7% (c. £48 mn). Fortress could have withdrawn just as Carlyle did in the tussle with Philip Morris for <a href="https://www.smartkarma.com/entities/vectura-group-plc" target="_blank" data-smartkarma-citation="entities:22201:1" rel="noopener">Vectura (VEC LN)</a>, but preferred to make its rival pay a bit extra.</p>
<p>The consideration represents an <strong>implied equity value</strong> of <strong>£7,032 mn</strong> and an implied EV of £10,113 mn. This also represents <strong>9.1x EV/Fwd EBITDA</strong> and <strong>20.4 Fwd P/E</strong>.</p>
<p>The 61% premium vs. closing price prior to commencement of the offer period highlights the extreme lengths PE firms are willing to go to spend its dry powder, amid a global deal frenzy.</p>
<p>The only approvals required by CD&amp;R are the approval by the requisite majority of scheme shareholders at the Court Meeting and Morrisons shareholders at the General Meeting and sanction of the Scheme by the Court.</p>
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<p>According to my calculations, the winning bid should achieve an <strong>11.8% IRR by year 8</strong>. Assumptions are an exit multiple of 8.5x (this would be a substantial re-rating vs. the previously considered 7.9x), cutting capex by a fifth, an EBITDA margin improvement to 6.3% (a c. 20 bps gain vs. Capital IQ consensus forecasts, with the necessary caveat that such a move may drive customers out of the stores and therefore lead to a loss of market share). </p>
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<p><strong>Gross spread</strong> is <strong>0.5%</strong>. The deal will complete. Time to surrender the shares.</p>

At the awaited auction for Wm Morrison Supermarkets (MRW LN), CD&amp;R increased its bid to 287p against a bid of 286p made by Fortress. CD&amp;R took its prey. Fortress, which had preemptively struck (Fortress/Morrisons: 272p Pre-Emptive Strike) saved face and CD&amp;R won by increasing its stretched offer by just 0.7% (c. £48 mn). Fortress could have withdrawn just as Carlyle did in the tussle with Philip Morris for Vectura (VEC LN), but preferred to make its rival pay a bit extra.
The consideration represents an implied equity value of £7,032 mn and an implied EV of £10,113 mn. This also represents 9.1x EV/Fwd EBITDA and 20.4 Fwd P/E.
The 61% premium vs. closing price prior to commencement of the offer period highlights the extreme lengths PE firms are willing to go to spend its dry powder, amid a global deal frenzy.
The only approvals required by CD&amp;R are the approval by the requisite majority of scheme shareholders at the Court Meeting and Morrisons shareholders at the General Meeting and sanction of the Scheme by the Court.






According to my calculations, the winning bid should achieve an 11.8% IRR by year 8. Assumptions are an exit multiple of 8.5x (this would be a substantial re-rating vs. the previously considered 7.9x), cutting capex by a fifth, an EBITDA margin improvement to 6.3% (a c. 20 bps gain vs. Capital IQ consensus forecasts, with the necessary caveat that such a move may drive customers out of the stores and therefore lead to a loss of market share). 






Gross spread is 0.5%. The deal will complete. Time to surrender the shares.

<p>As per <a href="https://www.reuters.com/world/uk/philip-morris-lifts-bid-uks-vectura-165-pence-per-share-2021-08-08/" target="_blank" rel="noopener">Reuters</a>, on <strong>8 August <a href="https://www.smartkarma.com/entities/philip-morris-international" target="_blank" data-smartkarma-citation="entities:13328:1" rel="noopener">Philip Morris International (PM US)</a> raised its bid</strong> for <a href="https://www.smartkarma.com/entities/vectura-group-plc" target="_blank" data-smartkarma-citation="entities:22201:1" rel="noopener">Vectura (VEC LN)</a> to <strong>165p/share</strong>, c. <strong>6.5% higher than</strong> the <strong>last recommended</strong> 155p/share bid on<strong> 6 August </strong>by <strong>Murano Bidco (Carlyle)</strong>.</p>
<p>The improved bid by Philip Morris is c. 2.5% above the TP in my last insight, and represents <strong>17.3x EV/Fwd EBITDA</strong>. It reflects a full price, in my view. Vectura has strategic value for Philip Morris "PMI intends to operate Vectura as an autonomous business unit that will form the backbone of its inhaled therapeutics business".</p>
<p>My <strong>new TP</strong> is <strong>165p</strong>, as I believe that the Board of Vectura will withdraw the recommendation issued for the last Carlyle offer and will recommend the last offer by Philip Morris, which is determined to win. On this basis, I <strong>reiterate long VEC LN</strong>. Gross spread is 0.6%, with limited downside, in my view.</p>
<p>Shares of Vectura may increase over the last offer by Philip Morris upon market opening on 9 August. </p>

As per Reuters, on 8 August Philip Morris International (PM US) raised its bid for Vectura (VEC LN) to 165p/share, c. 6.5% higher than the last recommended 155p/share bid on 6 August by Murano Bidco (Carlyle).
The improved bid by Philip Morris is c. 2.5% above the TP in my last insight, and represents 17.3x EV/Fwd EBITDA. It reflects a full price, in my view. Vectura has strategic value for Philip Morris "PMI intends to operate Vectura as an autonomous business unit that will form the backbone of its inhaled therapeutics business".
My new TP is 165p, as I believe that the Board of Vectura will withdraw the recommendation issued for the last Carlyle offer and will recommend the last offer by Philip Morris, which is determined to win. On this basis, I reiterate long VEC LN. Gross spread is 0.6%, with limited downside, in my view.
Shares of Vectura may increase over the last offer by Philip Morris upon market opening on 9 August. 

<p>On 9 July, <a href="https://www.smartkarma.com/entities/philip-morris-international" target="_blank" data-smartkarma-citation="entities:13328:1" rel="noopener">Philip Morris International (PM US)</a> agreed to acquire <a href="https://www.smartkarma.com/entities/vectura-group-plc" target="_blank" data-smartkarma-citation="entities:22201:1" rel="noopener">Vectura (VEC LN)</a> for 150p/share, approximately £918 mn via a scheme of arrangement.</p>
<ul class="">
<li>This is a 10.3% increase over Carlyle's offer and 3.4% above my TP ex-dividend.</li>
<li>In my prior insight <a href="https://www.smartkarma.com/insights/carlyle-vectura-group-expectations-of-a-sweetened-bid" target="_blank" data-smartkarma-citation="insights:52066" rel="noopener">Carlyle/Vectura Group: Expectations of a Sweetened Bid</a>, I mentioned the market expected a sweetened bid.</li>
<li>Vectura paid a 19p dividend on 11 June.</li>
</ul>
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<p>Philip Morris is expanding into products beyond tobacco and nicotine, as part of a natural evolution into a broader healthcare and wellness company. In February 2021, it announced its ambition to generate at least $1 bn in annual net revenues from Beyond Nicotine products by 2025 and identified respiratory drug delivery and self-care wellness as a key focus, for which it is expanding its capabilities in inhaled and oral product formulations.</p>
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<p>The Vectura Directors have withdrawn their recommendation of the Carlyle Offer and will adjourn the Carlyle Offer Shareholder Meetings convened for 12 July 2021.</p>
<p>The market expects a raised offer by Carlyle, which seeks to scale Vectura's business. At the same time, Vectura is strategic in the new quest of Philip Morris.</p>
<p>New <strong>TP</strong> (comps based) of <strong>161p</strong> ($2.24). This is 7% above Philip Morris's offer, and 3.9% over the closing share price of 9 July.</p>
<p>Recommendation is <strong>long VEC LN</strong>.</p>

On 9 July, Philip Morris International (PM US) agreed to acquire Vectura (VEC LN) for 150p/share, approximately £918 mn via a scheme of arrangement.

This is a 10.3% increase over Carlyle's offer and 3.4% above my TP ex-dividend.
In my prior insight Carlyle/Vectura Group: Expectations of a Sweetened Bid, I mentioned the market expected a sweetened bid.
Vectura paid a 19p dividend on 11 June.




Philip Morris is expanding into products beyond tobacco and nicotine, as part of a natural evolution into a broader healthcare and wellness company. In February 2021, it announced its ambition to generate at least $1 bn in annual net revenues from Beyond Nicotine products by 2025 and identified respiratory drug delivery and self-care wellness as a key focus, for which it is expanding its capabilities in inhaled and oral product formulations.



The Vectura Directors have withdrawn their recommendation of the Carlyle Offer and will adjourn the Carlyle Offer Shareholder Meetings convened for 12 July 2021.
The market expects a raised offer by Carlyle, which seeks to scale Vectura's business. At the same time, Vectura is strategic in the new quest of Philip Morris.
New TP (comps based) of 161p ($2.24). This is 7% above Philip Morris's offer, and 3.9% over the closing share price of 9 July.
Recommendation is long VEC LN.

Philip Morris Outbids Carlyle in Healthcare Push

United Kingdom

Vectura Group PLC develops inhaled therapies for the treatment of respiratory diseases.  The Company's main products are used to treat asthma and chronic obstructive pulmonary disease.  Vectura also develops products for lung pathologies and non-respiratory diseases.

Vectura (VEC LN)

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