Meda buys Rottapharm for $3.1 billion to be 'bigger, stronger, better'

STOCKHOLM Thu Jul 31, 2014 8:12am EDT

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STOCKHOLM (Reuters) - Swedish drug firm Meda said on Thursday it had agreed to buy Rottapharm for $3.1 billion in a deal that will boost its profitability and emerging market presence just weeks after the Italian firm scrapped its flotation plans.

The deal, the biggest by far in Meda's history, puts weight behind its chief executive's words that it prefers "to eat and not to be eaten" in an industry that has seen a frenzy of M&A. Meda itself has been a takeover candidate but turned down approaches from U.S. drug firm Mylan.

"This means increased scale, reach and profitability, and by this I think Meda will become a company that, to simplify this, is bigger, is stronger, but especially is also better," Meda Chief Executive Jorg-Thomas Dierks told a conference call.

Hopes for a new bid from Mylan were dashed this month when Mylan bought a product portfolio from rival Abbott, sending Meda shares down by almost 5 percent in a day. Swedbank analyst Johan Unnerus said the Rottapharm deal and integration would probably mean there would not be other approaches for Meda in the near term.

"But these are relatively uncomplicated deals to integrate, so if there are no major problems in that process, that discussion will probably stay on the table," Unnerus said.

As long as the consolidation of the sector continues, fueled by scale advantages and a need to cut costs while financing is readily available, a takeover of Meda by a larger rival could still happen, he added.

EMERGING MARKETS, SYNERGIES

Buying Rottapharm will increase Meda's sales in emerging markets by 50 percent, giving it access to new key markets in South East Asia while boosting some treatment areas, such as orthopedics. Based on 2013 sales, Rottapharm's anti-arthritis drug Dona is the biggest seller for the combined firm.

Meda said the 21.2 billion Swedish crown transaction would include 15.3 billion crowns in cash, a 2.6 billion crown deferred payment, and 30 million Meda shares issued to Rottapharm's main owner, the Rovati family, making it the second-biggest owner of Meda with a 9 percent stake.

The deal would be financed with bank debt and a 2 billion crown share issue, Meda said.

Rottapharm had sales corresponding to around 5 billion Swedish crowns in 2013, against 13.1 billion crowns for Meda. Its earnings before interest, tax, depreciation and amortization (EBITDA) were around 1.4 billion crowns.

Meda said it saw 900 million crowns of cost savings for the combined firm, taking full effect in 2016.

Adding those synergies to Rottapharm's profits last year would mean the deal valued it at just above 9 times 2013 EBITDA earnings, including debt. Meda trades around 11 times last year's EBITDA earnings on an enterprise value basis.

Rottapharm this month pulled plans for an initial public offering in Milan, citing unfavorable market conditions.

A source close to the deal said discussions between the two firms had been going on before that. "They didn't start too long before the decision to pull the IPO, but definitely they had been going on when that happened."

The drug industry, which has seen a wave of mergers in recent months, is trying to cut costs and add specialized expertise as it faces pressure on pricing from healthcare service providers in developed countries.

Meda said it expected to finalize the acquisition of Rottapharm, which is present in 90 countries, in the fourth quarter and that it expected no major antitrust issues.

Meda shares were up 3.4 percent by 0707 ET, whereas the wider Stockholm market was down 0.9 percent. Rothschild advised Meda on the deal, whereas Danske Bank, Nordea and SEB provided financing. Rottapharm had no financial advisor.

($1 = 0.7470 Euros)

($1 = 6.8889 Swedish Crowns)

(Reporting by Sven Nordenstam and Anna Ringstrom, Additional reporting by Valentina Za in Milan; Editing by Catherine Evans)

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