2CASE STUDIES IN FINANCE (FIN3CSF) – SEMESTER 1, 2019
CASE STUDY 3: FIRM VALUATION AND DEAL NEGOTIATION
This case study relates to the deal team planning associated with a potential friendly corporate acquisition transaction involving two companies operating in the wider healthcare industry in Australia. The companies involved in the acquisition transaction are:
CSL Limited (the bidding company)
Mayne Pharma Group Limited (the target company)
Facing increasing competition in CSL Limited’s primary activities and markets relating to the development and distribution of blood plasma therapy treatment products, the company is looking to expand its product development into new drug delivery mechanisms and also into additional disease and treatment areas. The company’s Board of Directors has completed a search for potential suitable target companies to facilitate this expansion using external growth and acquisition and has identified Mayne Pharma Group Limited as its preferred target in meeting these strategic requirements. Following an initial approach to Mayne Pharma Group Limited, both companies have developed deal execution teams including advisory, financial and legal representatives to conduct initial deal planning and negotiation activities.
As part of this activity you will be allocated into a deal execution team representing either the bidder or the target company. The tasks that your deal execution team will have to complete are:
The preparation and submission of an independent expert’s valuation report on your representative company providing 1) a summary of the company’s structure and operations,
2) a structured financial analysis of the company with particular focus on operating, efficiency and performance aspects and potential restructuring actions and 3) an estimation of the current intrinsic (fundamental) market valuation of your representative company’s equity shares to be used as part of acquisition decision-making. This valuation estimate should be determined from using a number of valuation methods and approaches and can
be presented as either a range or point valuation estimate. This analysis should then be integrated into a conclusion in terms of the implications for the acquisition offer planning process.
The preparation and submission of a negotiation outcome report incorporating 1) the outcome from the acquisition offer planning meeting negotiation between the bidding and target representative deal teams, and particularly whether agreement or otherwise on a friendly merger / acquisition offer arrangement has been reached, 2) outlining of any specific bid conditions or offers terms that have been agreed on by both bidding and target
company parties and 3) any particular key problematic issues or concerns that should be
reported to their representative company.
The following section provides company description and financial, structural and performance information for the two deal companies:
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CSL Limited
CSL Limited listed on the Australian Securities Exchange in June 1994 as part of the Commonwealth Government privatisation of the former Commonwealth Serum Laboratories business. The company has since become a global biotechnology success story, including the development of the A/H1N1 Swine Flu vaccine in 2009, Australian animal antivenom treatment products (such as for poisonous snake and spider bites) and internationally approved and distributed haemophilia (blood-clotting and coagulant) and blood plasma therapy and immune deficiency injection, concentrate and spray drug therapy products. The company has two major business divisions, Seqirus – which produces flu and other vaccines and antivenom treatments, and CSL Behring – which produces immune deficiency and blood plasma and coagulant drug therapy products.
The following table provides a summary of financial, structural and performance information for CSL Limited for the June 30th financial year ends from 2014 to 2018 (All figures, except for per share, issued capital and percentage statistics, are expressed in A$Million):
2014 2015 2016 2017 2018
Key indicators
No. of issued shares (Mill.) 474.7883 464.8328 456.6087 453.2518 452.4008
Market capitalisation 31597.1614 40240.5755 51222.3640 62562.3460 87141.4421
Share price ($) 66.5500 86.5700 112.1800 138.0300 192.6200
Price/Earnings ratio (times) 22.7732 22.7744 35.6727 35.9828 36.5760
Market / Book ratio (times) 9.4132 11.2508 14.8168 15.2105 15.7862
Earnings per share ($) 2.9223 3.8012 3.1447 3.8360 5.2663
Dividends per share ($) 1.2293 1.6071 1.7014 1.7738 2.2832
Dividend payout ratio (%) 42.0662 42.2788 54.1037 46.2409 43.3549
Trading Information
Operating revenue 5663.2696 7107.5521 7957.8508 8600.8840 10266.4051
Operating expenses 3898.1953 4811.3281 6239.6984 6490.5096 7044.1077
Research and development expenditure
495.1168 602.4740 826.5553 838.9236 950.3450
Earnings before interest,
taxes, depreciation and amortisation (EBITDA)
1944.9045
2496.4844
2232.4266
2509.4904
3665.2686
Earnings before interest and
taxes (EBIT)
1738.0042
2260.4167
1935.7662
2299.6620
3263.8344
Profit before tax 1703.0786 2203.1250 1858.0662 2196.8279 3129.7524
Net profit after tax before
abnormals
1387.4735 1766.9271 1435.9009 1738.6895 2382.4922
Net profit after tax after
abnormals
1387.4735 1795.5729 1673.0407 1738.6895 2339.1963
Net interest expense 34.9257 57.2917 77.7000 102.8341 134.0820
Income tax expense 315.6051 436.1979 422.1654 458.1383 747.2602
Net operating cash flows 1444.4798 1775.5208 1578.1263 1620.6448 2573.5354
Return on total assets (%) 20.8197 21.1998 14.0995 14.6601 16.3432
Return on equity (%) 41.3346 49.4011 41.5355 42.2720 43.1604
Structural information
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Cash and cash equivalents 646.1783 725.0000 749.5287 1097.8939 1102.2866
Current assets 3405.0701 4347.7865 5141.3951 5982.9693 6756.4606
Property, plant & equipment 1943.7367 2397.5260 3217.8831 3825.6630 4805.0331
Total assets 6664.2251 8334.6354 10184.0830 11859.9844 14577.8650
Current liabilities 897.3461 1218.8802 1850.7945 2103.6141 2590.5831
Long-term debt 2000.7431 2965.7552 4148.9362 5008.7103 5629.2789
Total liabilities 3307.5371 4757.9427 6727.0401 7746.8799 9057.7730
Share capital -2970.0637 -4635.9375 -5673.3100 -5894.8258 -6270.4641
Retained earnings 5542.9936 7813.5417 8877.3229 9625.4550 11487.2142
Total shareholders’ equity 3356.6879 3576.6927 3457.0428 4113.1045 5520.0920
Long-term debt to Total
assets (%)
30.0221 35.5835 40.7394 42.2320 38.6152
Total liabilities to
shareholders’ equity (%)
98.5357 133.0263 194.5894 188.3463 164.0874
Other relevant information relating to CSL Limited is:
The beta coefficient for CSL Limited is 1.15, compared to the average beta coefficient for
the pharmaceuticals industry of 1.15.
Consensus analyst forecasts for earnings per share (EPS) and dividends per share (DPS)
for the 2019 financial year are $5.9110 per share and $2.6970 per share, respectively.
Long-term average earnings (including residual earnings) and dividend growth forecasts
from 2020 onward for CSL Limited are 5.75% and 6.75%, respectively.
The closing price of CSL Limited shares was $195.00 on April 24th 2019.
The issued share capital for CSL Limited at the end of the 2019 financial year is expected
to be 450.60 million shares.
Assume that the analysis is being undertaken on April 24th 2019.
The following table provides information on Australian and international listed peer companies
operating in the same industry as CSL Limited as at April 24th 2019 (figures are in the
currencies indicated):
Baxter
International
Inc (US$)
Cochlear
Limited (A$)
Johnson &
Johnson
Inc. (US$)
Pfizer Inc.
(US$)
Market capitalisation 52,137.00 10,445.51 434,624.91 231,180.06
No. of issued shares (Mill.) 683.495 57.71 3,119.84 5,872.00
Share price ($) 76.28 181.00 139.31 39.37
Book value of Equity 7,816.00 610.80 59,752.00 63,758.00
Enterprise value 53,780.00 10,541.28 446,997.91 271,800.06
EBITDA 1,899.00 379.50 20,049.00 11,885.00
Net profit after tax 1,624.00 245.80 14,297.00 11,153.00
Total revenue 11,127.00 1,363.70 81,581.00 53,647.00
Research and development
expenditure
655.00 167.70 8,275.00 5,506.00
* Note that Baxter Pharmaceuticals Inc. and Cochlear Limited (from an Australian perspective) are the closest
peers to CSL Limited.
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Mayne Pharma Group Limited
Mayne Pharma Group Limited was created in a de-merger transaction in 2005 following the previous acquisition of the ASX-listed FH Faulding and Co Limited by Mayne Group Limited in 2001. This de-merger resulted in the listing of Mayne Pharma Group Limited (pharmaceutical business segment), and Symbion Health Limited (healthcare business segment) as separate companies. The Mayne Pharma business was acquired by Hospira Inc. in
2007 and was previously known as Halcyen Pharmaceuticals Limited until November 2011.
Mayne Pharma Group Limited is involved in the development and distribution of injectable and, particularly, oral drug delivery systems for the treatment of cardiovascular disease, bacterial, skin and fungal infections and chronic pain. The company has research and development and production facilities in Australia and the US and distributes its drug treatment products in Australia, North America, Europe and Asia.
The following table provides a summary of financial, structural and performance information for Mayne Pharma Group Limited for the June 30th financial year ends from 2014 to 2018 (All figures, except for per share, issued capital and percentage statistics, are expressed in A$Million):
2014 2015 2016 2017 2018
Key indicators
No. of issued shares (Mill.) 586.6515 786.7545 810.0463 1510.9297 1564.7222
Market capitalisation 498.6538 778.8870 1547.1884 1646.9134 1361.3083
Share price ($) 0.8500 0.9900 1.9100 1.0900 0.8700
Price/Earnings ratio (times) 26.8987 63.0573 32.2091 17.5806 32.7068
Market / Book ratio (times) 3.1308 2.4174 4.1842 1.2549 1.1021
Earnings per share ($) 0.0316 0.0157 0.0593 0.0620 0.0458
Dividends per share ($) 0.0000 0.0000 0.0000 0.0000 0.0000
Dividend payout ratio (%) 0.0000 0.0000 0.0000 0.0000 0.0000
Trading Information
Operating revenue 142.1810 140.3240 266.1900 571.7370 529.1410
Operating expenses 104.2110 112.5500 187.5710 397.0060 398.3940
Research and development
expenditure
14.5520 15.5880 18.7310 18.2750 32.3030
Earnings before interest,
taxes, depreciation and
amortisation (EBITDA)
39.2170
35.4350
86.7390
208.5440
134.4980
Earnings before interest and
taxes (EBIT)
29.3580 21.9330 65.3620 134.8760 76.6150
Profit before tax 25.2600 16.3430 63.3290 123.6450 67.4200
Net profit after tax before
abnormals
18.5280 12.6370 48.0150 93.7360 71.6500
Net profit after tax after
abnormals
21.2900 7.5370 34.5230 86.0260 -134.2570
Net interest expense 4.0980 5.5900 2.0330 11.2310 9.1950
Income tax expense 6.7320 3.7060 15.3140 29.9090 -4.2300
Net operating cash flows 26.1360 22.4200 53.5040 15.2370 121.4980
Return on total assets (%) 5.2101 6.4342 6.4623 2.2350 3.9142
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Return on equity (%) 12.2944 9.9392 12.6239 3.3051 5.8009
Structural information
Cash and cash equivalents 14.8130 59.2010 47.4810 63.0270 87.3120
Current assets 65.8950 156.8200 1108.6500 429.0030 480.7670
Property, plant & equipment 53.4900 59.5970 84.4490 189.2720 230.0510
Total assets 265.8200 528.9460 1557.3810 1914.9200 1830.5070
Current liabilities 30.3790 95.0780 1055.9240 199.8950 179.8970
Long-term debt 45.6560 61.5760 77.1670 327.1220 374.1320
Total liabilities 106.5460 206.7440 1181.1600 602.4960 595.3500
Share capital 137.4980 255.8340 263.1610 1130.4040 1131.7610
Retained earnings 16.4160 24.1750 61.5300 150.0970 23.5250
Total shareholders’ equity 159.2740 322.2020 376.2210 1312.4240 1235.1570
Long-term debt to Total
assets (%)
17.1755 11.6413 4.9549 17.0828 20.4387
Total liabilities to
shareholders’ equity (%)
66.8948 64.1660 313.9538 45.9071 48.2004
Other relevant information relating to Mayne Pharma Group Limited is:
The beta coefficient for Mayne Pharma Group Limited is 1.30, compared to the average beta coefficient for the pharmaceuticals industry of 1.15.
Consensus analyst forecasts for earnings per share (EPS) and dividends per share (DPS) for the 2019 financial year are $0.035 per share and $0.000, respectively.
Long-term average earnings (including residual earnings) and dividend growth forecasts from 2020 onward for Mayne Pharma Group Limited are 5.40% and 0.00%, respectively.
The closing price of Mayne Pharma Group Limited shares was $0.70 on April 24th 2019.
The issued share capital for Mayne Pharma Group Limited at the end of the 2019 financial year is expected to be 1,580.75 million shares.
Assume that the analysis is being undertaken on April 24th 2019.
The following table provides information on Australian listed peer companies operating in the same industry as Mayne Pharma Group Limited as at April 24th 2019 (figures are in A$Million unless otherwise stated):
Clinuvel
Pharmaceuticals
Limited
Mesoblast
Limited
Sirtex
Medical
Limited*
Starpharma
Holdings
Limited
Market capitalisation 1,073.20 772.88 1,667.80 464.61
No. of issued shares (Mill.) 48.96 498.63 56.44 371.69
Share price ($) 21.92 1.55 29.55 1.25
Book value of Equity 89.42 738.75 159.18 53.28
Enterprise value 1,037.00 802.15 1,823.66 413.34
EBITDA 52.72 -83.70 78.44 -11.05
Net profit after tax 43.22 -47.75 46.47 -10.28
Total revenue 105.97 89.89 219.91 3.88
Research and development
expenditure
10.73 77.19 128.00 10.58
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* Note that the information for Sirtex Medical Limited is as at September 13th 2018 prior to the company being
acquired by a consortium comprising CDH Genetech and China Grand Pharmaceutical and Healthcare Holdings
Relevant market-wide information as at April 24th 2019 is:
The 10-year Australian Government Bond yield was 1.790% on April 24th 2019.
The S&P/ASX 200 Accumulation Index has provided an average annual return of 7.450% over the 10-year period to April 24th 2019.
Required:
This combined independent expert valuation and negotiation outcome report is due to be submitted to the Board of Directors of your representative company , via the FIN3CSF subject LMS site. This case study contributes
30% to the overall final assessment in the FIN3CSF subject. Both aspects of the case study are to completed in your designated group, and the maximum word limit, excluding calculations and financial analysis reporting (such as tables), is 500 words per student.
Only one submission indicating the relevant group members should be made by your group with this submitted by one member of your group, who should confirm the integrity of the submission on behalf of all group members.