European Event-driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

<a href="https://www.smartkarma.com/entities/grifols-sa" target="_blank" data-smartkarma-citation="entities:21274:1" rel="noopener">Grifols SA (GRF SM)</a> entered into a share purchase agreement to acquire a 45.48% stake in <a href="https://www.smartkarma.com/entities/biotest-ag" target="_blank" data-smartkarma-citation="entities:21589:1" rel="noopener">Biotest AG (BIO GR)</a> from Tiancheng International Investment Limited for €1.1 bn on 17 September 2021. In a related transaction, Grifols will launch a voluntary tender offer to acquire the remaining ordinary and preference shares in Biotest at same terms (€43/ordinary share and €37/preference share). Both will be paid in cash and represents a premium of 23% and 4% over the closing price of 16 September for each type of share. The deal values the equity of Biotest at €1.6 bn (13% of Grifols's market cap pre-announcement) and EV of €2 bn.
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Although preference shares have identical (or marginally greater) economic interest in the underlying company, they can be seriously disadvantaged in the event of a takeover. Premium for control is normally delivered to the voting ordinary shares, thus preference shares receive a discount to the ordinary share bid.
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The discount of preference shares vs. ordinary shares of Biotest has jumped to 10.2% following the deal announcement.
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Therefore there are no grounds for Grifols to offer more than €37/preference share, in my view, as this price is above the average market price for preference shares over the last three months prior to the publication of the decision to launch an offer.
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Grifols clarified that the purchase of Biotest will go ahead even if the takeover bid does not achieve 100% of the shares. Once Grifols concludes the deal with Tiancheng, it will have c. 45.5% of the capital, before receiving any acceptances for the mandatory offer. This means that if not all shareholders tender, Grifols will later be in a position to buy more shares at a low price in the market without being obliged to launch further mandatory offers.
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The takeover seeks to increase plasma collection capacity and will boost the company's pipeline and plasma business. Following the acquisition, Grifols should reach a revenue of over €7 bn and EBITDA over €2 bn. In 2020 Grifols had revenues of €5.34 bn and pretax profit from continuing operations of €879 mn. Net debt/EBITDA will increase to 5.4x; that is, over €7 bn. 
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Grifols is evaluating financing the purchase of Biotest by issuing €2,000 mn of debt and announces that it will not pay cash dividends or make acquisitions until it reduces its leverage below 4x net debt/EBITDA.
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The price paid is high, it represents EV/22e EBITDA of 35.6x vs 13.8x for Grifols (source Capital IQ consensus) and the operation dilutes Grifols' EPS by -5%. Biotest has incurred in annual net losses for several years. Furthermore, the increase in indebtedness means raising Grifols' 2022e net debt/EBITDA to 4.8x (proforma) vs. Capital IQ consensus estimate of 3.7x. The implications for the dividend are negative as I estimate that Grifols will stop paying cash dividends until 2024e, although it will foreseeably offer payments in shares. This is negative for the Grifols B shares (non-voting), and likely to increase the discount vs. A shares (ordinary).
The operation seems well secured and should succceed. Gross spread is negative at the moment for BIO3 GR (trading at €39 vs. €37 offered) therefore I would wait for any share price weakness before setting up a position.

Grifols SA (GRF SM) entered into a share purchase agreement to acquire a 45.48% stake in Biotest AG (BIO GR) from Tiancheng International Investment Limited for €1.1 bn on 17 September 2021. In a related transaction, Grifols will launch a voluntary tender offer to acquire the remaining ordinary and preference shares in Biotest at same terms (€43/ordinary share and €37/preference share). Both will be paid in cash and represents a premium of 23% and 4% over the closing price of 16 September for each type of share. The deal values the equity of Biotest at €1.6 bn (13% of Grifols's market cap pre-announcement) and EV of €2 bn.


Although preference shares have identical (or marginally greater) economic interest in the underlying company, they can be seriously disadvantaged in the event of a takeover. Premium for control is normally delivered to the voting ordinary shares, thus preference shares receive a discount to the ordinary share bid.


The discount of preference shares vs. ordinary shares of Biotest has jumped to 10.2% following the deal announcement.


Therefore there are no grounds for Grifols to offer more than €37/preference share, in my view, as this price is above the average market price for preference shares over the last three months prior to the publication of the decision to launch an offer.


Grifols clarified that the purchase of Biotest will go ahead even if the takeover bid does not achieve 100% of the shares. Once Grifols concludes the deal with Tiancheng, it will have c. 45.5% of the capital, before receiving any acceptances for the mandatory offer. This means that if not all shareholders tender, Grifols will later be in a position to buy more shares at a low price in the market without being obliged to launch further mandatory offers.


The takeover seeks to increase plasma collection capacity and will boost the company's pipeline and plasma business. Following the acquisition, Grifols should reach a revenue of over €7 bn and EBITDA over €2 bn. In 2020 Grifols had revenues of €5.34 bn and pretax profit from continuing operations of €879 mn. Net debt/EBITDA will increase to 5.4x; that is, over €7 bn. 

Grifols is evaluating financing the purchase of Biotest by issuing €2,000 mn of debt and announces that it will not pay cash dividends or make acquisitions until it reduces its leverage below 4x net debt/EBITDA.

The price paid is high, it represents EV/22e EBITDA of 35.6x vs 13.8x for Grifols (source Capital IQ consensus) and the operation dilutes Grifols' EPS by -5%. Biotest has incurred in annual net losses for several years. Furthermore, the increase in indebtedness means raising Grifols' 2022e net debt/EBITDA to 4.8x (proforma) vs. Capital IQ consensus estimate of 3.7x. The implications for the dividend are negative as I estimate that Grifols will stop paying cash dividends until 2024e, although it will foreseeably offer payments in shares. This is negative for the Grifols B shares (non-voting), and likely to increase the discount vs. A shares (ordinary).
The operation seems well secured and should succceed. Gross spread is negative at the moment for BIO3 GR (trading at €39 vs. €37 offered) therefore I would wait for any share price weakness before setting up a position.

Grifols/Biotest: Preference Shareholders at Disadvantage & Grifols's Leverage