Ascendis Health: no other way for the shareholders, than recapitalisation vote
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Ascendis Health (Ascendis) is under the water and the Ascendis shareholders have to decide whether they support the group recapitalisation or not.
Shareholders, big or small, lost their boots by investing in Ascendis in the group’s hey days as Ascendis’s market capitalisation shrunk to roughly R255 million currently from more than R11 billion at the end of 2016.
After listing in 2013 Ascendis grew by acquiring new businesses, but by such an extent that goodwill and intangibles made up about 90 percent of the group’s non-current assets. Until June 2016 most of the acquisitions were financed by debt and Mr Market bought into the so-called success story which saw the average price-to-book ratio or market capitalisation (number of issued shares times share price) relative to ordinary shareholders’ interest jump to 3 times in the 2016 financial year from an average of about 2.5 times in 2014.
Then, the now famous happened. A rights issue and a placement of shares to a total value of R3bn followed in August that year while borrowings net of cash increased by R3.6bn to fund the group’s foray into Europe. Goodwill and intangibles jumped by R4.5bn to R7.7bn. Yes, Mr Market bought air, but Steinhoff’s implosion early in December that year had him think again about the net realisable value of goodwill and intangibles. The group’s lenders would certainly somehow de-risked their exposure by selling Ascendis shares short – selling shares that you do not own and borrowing shares from someone to deliver shares sold short.
The group’s market capitalisation fell to R2bn from R8.6bn as higher finance costs ate into operating profits and cash flows with finance costs as a percentage of operating profits increased to 49 percent in the first half of the 2019 financial year from the prior year’s 38 percent. Despite this, the group’s goodwill and intangibles grew by R1bn over the same period.
As a result of the breach of the financial covenants based on key financial ratios for the year ended June, 30, 2019 all non-current borrowings relating to the secured syndicated facility have been classified as current. Although reasons such as a significant reduction in the share price was given, it was evident that the lenders forced the Group to revalue its assets to recoverable amounts. R4.2bn was impaired. Yes, Ascendis was on the brink of insolvency.
The group’s financial position worsened as such that finance costs as a percentage of operating profits in the first half of the 2021 financial year amounted to about 95 percent while borrowings amounted to R7.5bn after taking cash and equivalents into account. From the top, the group recapitalisation is reminiscent of a type of business rescue.
Ascendis’s board of directors has already engaged with various interested parties in the remaining assets. But what is or could be Ascendis worth post-group recapitalisation?
The group’s 2021 annual results will be released on September 30 and despite the Ascendis’s trading update on Monday, I had to rely on information provided in the Group Recapitalisation Circular to get a feel for the underlying value of the group post-recapitalisation. As per the Recapitalisation Circular, the pro forma consolidated statement of financial position (balance sheet) as at December, 31, 2020 for the six months ended December, 31, 2021 as if the recapitalisation was effective at that date, indicates ordinary shareholders’ interest of R185.4 million, or 39 cents per share. That compares to the share’s close of 52c on Monday.
To calculate the total market value of Ascendis post the recapitalisation, I use the enterprise value (EV) as defined by the Corporate Finance Institute. EV = Market capitalisation + Market Value of Debt – Cash and Equivalents + Minority Interest. Assuming a possible ratio of market capitalisation to ordinary shareholders’ interest of 1.5 (or 57c per share), debt, minority interest, and cash as per the pro forma balance sheet as at December, 31, 2020, I arrive at an enterprise value of R1 006bn. If a 15 percent control premium is allowed for, the market capitalisation could increase to R427.5 million or 87c per share.
Yes, there are risks as stipulated in the Circular to shareholders. In my opinion, there is no other way out for Ascendis shareholders than to vote for the group recapitalisation. That is, unless shareholders are prepared to lose their money or have a huge short position in the shares. There may even be some upside – who knows? Expect a barney among shareholders once the group recapitalisation is sealed and done, though.
Ryk de Klerk is analyst-at-large. Contact [email protected] He is not a registered financial adviser and his views expressed above are his own. He does not have a direct interest in the companies mentioned. You should consult your broker and/or investment advisor for advice. Past performance is no guarantee of future results.
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