Pharmstandard (US7171402065) – The Russian Job or interesting special situation with catalyst ?
A couple of weeks ago, when I analysed EGIS and other Eastern European Genric drug companies, I mentioned Pharmstandard OJSC as one of the big players in the interesting Russian Generics market.
A kept an eye on them mainly in order to gain a little bit more insight into the Russian market. But the story which developed over the last week is definitely woth sharing it.
Up until early July, everything looked great. Pharmstandard aggresively bought back shares in an amount of roughly 10% of their market cap. They communicated that they might use those shares to finance M&A transactions.
Then, in the beginning of July some strange news emerged (official press releases can be found here):
– first they stated that they want to do a spin-off of their OTC drug business
– then, on they same day they announced that they are in advanced talks on a potential M& A transaction
– then, still on the same day they announce that they will buy a company called “Bever Pharmaceutical” for 630 mn USD without describing the company at all.
– the bought company then again, will be included in the spin-off
– it is not clear if the spin-off would be listed or not or if GDR holders can legally get those spin-off shares
– then it came out, that one of Pharmstandard’s supervisory board members, Dr. Alexander Shuster is actually the owner of Bever and will become the second largest Pharmstandard shareholder via this transaction
– Nevertheless, a few days ago, a shareholder meeting approved the acquisition with the votes of the majority shareholders
– the next special shareholder meeting will be in September to decide on the spin off
Clearly, this story did not go well with investors. Both, the London listed GDRs as well as the Russian listed stocks got punished hard:
In my opinion, this clearly is not very shareholder friendly, but on the other hand, compared with what I have experienced in Italy (EMAK, Autostrada), this rather looks like an OK transaction at least with regard to the M&A transaction:
– they paid minority shareholders in cash via an open market share buy back
– they used pre “price drop” levels to determine the purchase price consideration
And, at least in Italy, buying into a stock AFTER such an event occured was usually an interesting entry point.
The special situation aspect: Potential buy back offer before spin off at 16.50 USD
Now it gets interesting. In their spin off presentation, they mention that there will be a buy back offer to shareholders before the spin off actually happens. In several articles (I did not found this on their website), a price of 16.50 USD per GDR was mentioned. According to the timeline, this should happen in November if everything works out.
So let’s do some quick math (EDIT: I wrote this yesterday…., today’s price is a lot higher):
If I buy today at 14.65 and get 16.50 in November, that’s a 12.7% return for 3 months. Not too bad. Clearly there is some downside, if the offer will not come and they spin offf without compensation for GDR holders. On the other hand, if the spin offf works out well, there could be significant upside on top of the 16,50 USD offer.
On top of that, I like the underlying business and I think the stock is cheap and undervalued (excluding the Corp Governance issues).
According to my model, the current Pharmstandard is worth far more. The company achieved on average over the last 6 years 20% net margins and 30% ROIC at a current valuation of PE/6, P/B 1.6 and EV/EBITDA at 5.5
Update: I started writing this post yesterday, when the stockprice was at 14.65 USD, today, it jumped already significantly to 15.39. For the time being I will remain on the sideline and watch.
Maybe there will be a opportunity for a odd-lot tender like Norislk 2 years ago. I would also consider adding a small stake if the price is at a ~10% discount to the offer prcie, so below 15 USD (up to 1% of the portfolio). So I will put in a limti order at 15 USD and wait how this interesting story developes.