Johannesburg - Bidvest’s last-minute offer for a 34.5 percent stake in Adcock Ingram has added to the drama of the battle with CFR Pharmaceuticals, but it seems unlikely to alter the fact that the outcome of the bid will be determined by the Public Investment Corporation (PIC).
Bidvest has built up its holding in Adcock to just 7 percent since it launched its R70 a share bid on December 2.
There could still be a last minute rush to sell to Bidvest before next Wednesday’s decisive meeting, but at this late stage, Adcock shareholders will probably have to give Bidvest an undertaking that they will attend the meeting and vote against the offer by Chile’s CFR.
If, however, the PIC has decided to vote in favour of the transaction then there is a good chance that it will go through.
So far there has been little sign of support for Bidvest’s position either in terms of share sales or shareholders’ comments. However, this may indicate that the only shareholders willing to express a view on the battle for Adcock are those who have given irrevocable undertakings to support CFR’s deal.
If the CFR transaction does get the necessary shareholder support next week, it is far from a done deal. Shareholders face further uncertainty and delay because of Bidvest’s legal challenge. Combined with the need to get approval from the competition authorities, it is possible that the transaction will not be finalised until the second half of next year.
CFR’s funding challenges have also added to the uncertainty and delays.
While the irritation with Bidvest’s frustrating actions is understandable, it does seem to overlook the fact that Bidvest was responsible for putting Adcock into play in the first place. In the absence of Bidvest’s offer in March, it is possible that Adcock shareholders would still be looking at a share price in the mid-fifties, which is analysts’ estimated fair value.
Determining the relative attractiveness of the two offers depends partly on whether the Adcock shareholder wants to make a capital profit on share trading, or is looking for a long-term investment. The PIC, which has been commendably quiet, is likely to be more interested in good quality long-term investments than it is in securing cash returns.
Some traders who have been buying Adcock shares after Bidvest’s initial move will be focused on securing maximum cash returns in the fastest time.
On paper the CFR deal does look more attractive. As Afrifocus analyst Alec Abraham pointed out, CFR is a trade buyer, which could bolster Adcock’s business model by providing growth markets in which to market and distribute its strong over-the-counter brands and antiretroviral drugs.
“Increased production through Adcock’s existing facilities enables economies of scale, which bolsters profitability,” Abraham said. The CFR deal also provides geographic diversification with promises of growth into Africa and south-east Asia.
However, the risks related to the CFR deal are significant. As Bidvest chief executive Brian Joffe has pointed out, this deal sees CFR acquiring a company that is twice its size. To do it, CFR has to take on considerable debt. There is also the fact that the CFR management’s capability is unknown to local investors. Indeed, CFR management’s ability to cope with the combined entity is unknown.
Related to this is the fact that CFR appears to be reliant on Adcock’s underperforming top management to realise the strategic benefits of the transaction. CFR has guaranteed the continued employment of Adcock’s two executive directors.
On Bidvest’s side, the list of advantages looks far shorter. It is essentially the potential for strategic input from Joffe and the Bidvest team. Joffe has said that he would be able to secure licensing agreements that would underpin strong growth in sales and profits. From any other bidder this might not look persuasive, but from a company that has generally over-delivered on its promises it could be sufficient to secure the support of long-term investors. - Business Report