US Edition Dechra Pharmaceuticals
528p -11.5p
Questor says BUY
At the end of last week, London-listed Dechra Pharmaceuticals unveiled the acquisition of US group DermaPet. It looks like a canny move for the veterinary products group.
Not only does it bring some significant new products into the company, but it shores up the group's US sales team as well, bringing critical mass to its operations across the pond. DermaPet develops and markets a range of dermatological products for animals, such as shampoos, conditioners and ear products.
The maximum payment for the business is $64m (£40.4m), with $42m cash up front. The rest of the consideration is a deferred payment – and depends on revenue targets being met.
Payments of $1m are due on the second and fourth anniversaries of the completion date, with $15m becoming payable between the second and sixth anniversaries of completion should DermaPet achieves revenues in excess of $15m in any rolling 12-month period following the first anniversary of completion. If revenues on the same criteria exceed $20m, a further $5m will become due.
For the six months to June 30, DermaPet's revenue was $6.9m and pre-tax profit was $3m.
To fund the purchase, Dechra has agreed a new £78m four-year bank facility which will replace its existing facilities. Debt at the end of June stood at just £6.7m, so the balance sheet is strong enough to be able to cope with a transaction of this size.
DermaPet was set up in 1991 by American Dr Steve Melman, who regularly appears on US TV and is the author of a number of well-received books on veterinary care. This transaction represents his exit from a business he has spent the best part of two decades building.
The company expects the purchase will be "materially" earning enhancing in its first full year of ownership.
Questor recommended the shares about a year ago because of Dechra's move into the US, where the companion animal market is significantly larger than it is in the UK.
In the UK there are 8m dogs, 8.4m cats and 1m horses. In the US there are even more – 75m dogs, 82m cats and 10m horses. The acquisition has accelerated the process of tapping this vast market and, although not without execution risk, it is a sound strategic move.
The purchase brings a number of interesting products into the group. The ones of note are TrizUltra, an anti-fungal and antibacterial skin treatment, DermaLyte, a shampoo for bathing allergic pets, and MalAcetic, for cleaning pets' infected ears.
Dechra will also acquire an additional five sales representatives and it is expected that about $1m of synergies could be extracted from the two operations. Restructuring costs are expected to be in the order of $1m.
The shares had underperformed the market since their initial recommendation, as Questor noted in the last update on September 9, but they have now started to perform following news of this strategic purchase.
The shares are trading on a June 2011 earnings multiple of 16.1 times, falling to 14.3 in 2012. The shares are yielding 2.1pc.
The shares were first recommended on October 25 last year at 427.9p and they are now up 23pc compared with a market up 8pc. The rating on the shares remains buy.