August 31, 2017 / 12:01 PM / a year ago

Breakingviews - Elliott’s Stada shakedown is cheeky but rational

LONDON (Reuters Breakingviews) - Bain Capital and Cinven are getting the Elliott shakedown. The private equity firms have bought a majority stake in German drugmaker Stada for 4.1 billion euros, but now the U.S. hedge fund wants a big premium in return for selling its minority shareholding. It’s a form of ransom – but the buyers can afford to pay it.

The logo of the pharmaceutical company Stada Arzneimittel AG is pictured at its headquarters in Bad Vilbel near Frankfurt March 14, 2012

Elliott is playing a game made easy by German law. A buyer of a company needs to have the support of three-quarters of a company’s shares at a shareholder meeting to control it fully. Even then, minority shareholders can hold out and petition in court for a higher price, while receiving generous dividend payments. Elliott now wants 74.40 euros a share, a premium of nearly half compared with the price when bidding started in February.

Bain and Cinven could just settle for the 63 percent stake they already have. If fewer than half of the remaining shareholders showed up to a shareholder meeting, the new owners would have 75 percent of the votes. Alternatively, the two private equity firms could buy out the whole thing. The snag is that, if this happened within a year, they would need to pay all the other shareholders the same amount per share – including those who have already tendered.

What if Bain and Cinven just paid everyone what Elliott has demanded? That would push up Stada’s enterprise value to about 5.7 billion euros, or about 12 times next year’s EBITDA. If they could borrow six times that, the equity investment would be about 2.9 billion euros. Assume the new owners grow EBITDA at 10 percent a year, of which a third is used to pay down debt, and sell at the same multiple five years hence. The internal rate of return would still be more than 20 percent, in line with what private equity groups target.

That wouldn’t leave much wiggle room. Stada might disappoint its new owners. Making generic drugs is competitive and slow-growing, and Stada is still a small player in the faster-growing over-the-counter drug business, so Bain and Cinven might want to wait and see what other shareholders, and possibly the courts, say. Elliott, however, probably knows exactly how far it can push its prey. Its move, while cheeky, looks rational.


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