Special situation: Stada Arzneimittel AG – swimming with the sharks (again)

Disclaimer: This is not investment advice. please do your own research !!!

Stada is a company I had been looking at many times in the past. A business which in principle is quite good (Generics and OTC drugs) but the company was run by a long time CEO who acted as it was his own company without owning a single share. He paid himself huge salaries, employed his son in a non-sensical but highly paid job, the company afforded itself a huge corporate center and so on. As a result, the company created little to no shareholder value in the 10 years up to mid 2016. As a comparison, the 10 year return of Stada until 03/2016 was only around 1,8% p.a. compared to 7,5 % p.a. for the MSCI Europe health care index, a significant underperformance.

Then however something happened which is still very rare in Germany: A local activist investor (Active Ownership Capital) and some other funds acquired a significant stake in the company and pushed for change.

To cut a long story short: The activists succeeded in ousting the CEO (and most of his friends in the Supervisory Board) and replacing him with someone who seems to work more in the favour of shareholders. The story made some waves, among others even the Economist thought it was worth a story.

In February some rumours surfaced that Private Equity Groups would be interested in buying Stada.

The first non-binding bid came from Cinven at 56 EUR per share, followed by a non-binding offer of 58 EUR by Advent, another PE player. This was reinforced by a binding offer from Advent of 58 EUR plus dividend a few days later. and an undisclosed 3rd buyer seems to have offered 58 EUR as well.

After that, Stada decided to set up a more formal process and agreed to open its books in order to maybe get an even higher offer. In the following days many other rumors came up, such as Permira and Bain Capital would be interested plus some Chinese buyers as well (well, there are always Chinese buyers these days…).

If we look at the stock chart, at first everything went according to plan and the stock price was slowly approaching 58 EUR:

stada

But then in the last few days the stock suddenly dropped. What happened ?

2 things basically:

First, end of last week, Stada cancelled scheduled meetings with the current bidders at short notice.In the news it was speculated that they want to give more time for a 3rd bidder to come up with an additional offer. The official statement was like this

STADA confirms current media reports that the expert sessions which were planned as part of the structured bidding process have been postponed based on the decision of the Supervisory Board. The Executive Board and the Supervisory Board mutually agree that the indicative bids do not yet reflect the fundamental value of STADA. Thus, the company, for the time being, wants to provide the bidders the opportunity to increase their offers. STADA objects current media reports that the delay in the process is aimed to make another committee composed of a private equity company and a strategic investor enter the process.

 

This cost around 2 EUR in the share price as some investors thought that this also could mean something else.

Funnily enough, the very next day they increased their 2019 forecasts significantly.

 

  • Significantly increased adjusted EBITDA target 2019 at Euro 570 to 590 million (previously: approx. Euro 510 million)
  • Increased adjusted Group sales target 2019 at Euro 2.650 to 2.700 billion (previously: approx. Euro 2.600 billion)
  • Adjusted EBITDA margin of about 23 percent expected mid-term

Then, as another surprise, beginning of this week Stada announced that they will not release their final 2016 numbers on Thursday this week but postpone it because of a “single digit million EUR issue” they need to still clarify. This again cost around 2 EUR in share price.  Again the official release:

Bad Vilbel, March 21, 2017 – Today, on March 21, 2017, the Executive Board of STADA Arzneimittel AG informed the public that the press and analyst conference on full year figures 2016 have been rescheduled to Wednesday, March 29, 2017.

The reason for this decision is the fact that in the process of the consolidated financial statements a reassessment of a transaction was undertaken. This reassessment will be aligned with auditors before closing the consolidated balance sheet. The reassessment regarding consolidation matters might result in an impact on adjusted EBITDA in the mid-single-digit million euro range and in an impact on sales in the low double-digit million euro range. In total, the Executive Board does not expect any material changes in the full year figures 2016. Guidance for 2017 remains unchanged.

So where are we now ?

At the time of writing we have a stock which trades at 54,40 EUR where we have a binding offer from one party at 58 EUR plus dividend (0,70). We might see a potentially higher bid or for some reason the whole process falls apart and the stock might go down. The 3 month average before the bids surfaced was around 49 EUR per share which I would use as the “undisturbed” basis price.

I would make the following assumptions /scenarios

I do think that the probability of a deal happening is higher than 50% but not 100%. To keep it simple I would assume 75%. Within this 75%, I do think there is a smaller chance to get more than 58 EUR plus dividend. I would assume with a 25% probability we get 60 EUR plus dividend.

This leads to 3 scenarios:

Scenario 1 (25%): Deal fails and I lose -5,4 EUR or -9,9%

Scenario 2 (50%). Deal closes at 58 EUR plus 0,70 dividend and I earn 4,30 EUR or 7,9%

Scenario 3 (25%): Deal closes at 60 EUR plus 0,70 dividend and I earn 6,30 EUR or 11,6%

Weighted by the probabilities, this gives me a ~4,4% expected return for a relatively short period of time (3 months ?) which looks attractive.

Clearly the loss could be higher in scenario 1, but I think it is very clear that even if this process fails, at some point in time buyers will come back like in the Syngenta case. So I think the downside is really limited here. One of the big advantages is clearly that there won’t be any big issues with any regulatory approvals unless the highest bid would be from a strategic Chinese buyer. Plus, the PE buyers execute quickly which we saw in the Sapec case.

Summary:

From a return/risk scenario Stada is somewhere between Sapec (higher uncertainty, more potential return) and Actelion (high certainty, lower potential return). But still I think it is very attractive and a pretty straight forward case. In the current environment I also prefer a higher exposure to “special situations”. So I decided to invest 5% of the portfolio into Stada at the current price of 54,40 EUR per share.

Be cautious: This is shark infested territory

One word of caution here: Stada is a relatively well known name and the story is well published. So one should not assume that this is “easy” money. Rather this is a case of “swimming with the sharks” as one can assume that many professional players look into this and the discount really includes some kind of risk. I still think it is worth the risk but one should be aware that more “hiccups” are very likley. The price of Stada will most liekly not go up in a straight line to 58,70 but go up and down depending on many rumours. If you can’t stand this (like some readers in the Actelion case), don’t do it.

Silhouette of Circling Sharks.

 

Again a disclaimer: This is not investment advice, PLEASE DO YOUR OWN RESEARCH

 

 

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