The Sirtex Medical board has a tough call to make in coming weeks: back a higher, more complex takeover offer by Chinese private equity firm CDH Investments or go with the more secure, lower offer from a US trade player, Varian Medical Systems.
There is a lot to weigh up over the merits and risks of each bid, not just the cash price per share of $33.60 and $28, respectively.
Varian was dealt a blow last week when the court knocked back its attempt to re-convene a shareholder meeting for May 31 to vote on its offer for the developer of novel targeted radiotherapy devices for liver cancer. The court decided to wait until July 3, to consider if supplementary disclosures will be sent to shareholders, with a meeting to be re-convened later that month. This allows the Sirtex board, lead by interim chairman John Eady, more time to fully dissect the Chinese offer, even as it continues to back the Varian proposal in the meantime.
While many market watchers would be familiar with US-listed $US10 billion Varian ($13.1 billion), CDH is more of a mystery. But that is not a reason to discount the latecomer. If nothing else, the fact it is willing to pay a massive multiple of 23.6 times earnings and is prepared to cop a $200 million break free if Sirtex walks away from the Varian bid should underline the serious nature of its bid.
Leading the transaction for the $US17 billion outfit is executive director Alex Wu, who has worked for the firm for more than six years, and previously worked for Hong Kong-based CITIC Capital and The Boston Consulting Group. However, CDH chief executive and co-founder Shuge Jiao is keeping a close eye.
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CDH was established in 2002 by six founders, differentiating it from the hordes of new private equity funds that have popped up to spend the new money flowing through Asia. The founders worked together in the 90s at the Hong Kong-listed China International Capital Corporation.
As of September 30, 2017, CDH has invested $US5.1 billion in 72 companies, of which 75 per cent are in consumer products, retailing, services and healthcare sectors. It has generated $US7.8 billion of realised proceeds from the full or partial exit of 50 companies.
Sources who are familiar with the firm said it is very active and credible, describing it variously as "the KKR of China" and "the real deal".
The firm has offices in China, Singapore and Hong Kong and employs an estimated 150 investment professionals. The firm manages $US17 billion in assets and specialises in buyouts, start-ups and growth capital with preference for investing in alternative technology and innovation.
Blessing in disguise for Varian
One of CDH's key strengths is its ability to proactively source and develop investment opportunities by relying on its experience, relationships and knowledge of China's complex business environment. It is understood CDH sees a major opportunity in bringing Sirtex to China, a plank that has always been missing in liver cancer treatment company's strategy.
The private equity giant is getting its ducks in a row. Street Talk revealed that its $1.9 billion counter takeover bid is bankrolled by regional financial services giant Bank of China Macau, which has provided financing commitments.
The takeover offer has come via CDH Genetech, which is 100 per cent owned by CDH's $US2.6 billion Fund V.
It's understood there are no Chinese state-owned enterprises players in Fund V. Investors include CalPERS, which invested $200 million into the fund in 2014, as well as the Canada Pension Plan Investment Board, CPP Investment Board and PGGM, the second largest pension fund in the Netherlands.
Other large backers of the fund include Singapore's GIC Private, AlpInvest Partners of the Netherlands, and the State of Oregon Public Employees Retirement Fund.
CDH has previously looked at assets in Australia, including radiation oncology group GenesisCare and private equity-backed beverage company Accolade Wines. However, thus far it has only purchased a Gippsland beef processor, Tabro Meats, in 2014. It has also invested in GO Healthy, a New Zealand supplements company.
Some have said this late-stage offer for Sirtex may be a blessing in disguise for Varian, whose $1.6 billion bid was based on projections that are far from the current performance.
After the deal with Varian was announced in January, Sirtex reported dose sales growth for its key radioactive product SIR-Spheres had declined 10.6 per cent in the first four months of the year, compared to the prior period. Uncertain times
Dose sales in the first half of fiscal 2018 were flat. Sirtex also said its underlying EBITDA for the full year would come in at the lower end of the previously flagged guidance range of $75 million to $85 million.
The CDH offer is conditional upon approval by Australian and US foreign investment regulators as well as advice from the independent expert concluding the CDH proposal is in the best interests of shareholders.
It is worth noting that the CDH offer is also conditional on the approval of CFIUS (Committee on Foreign Investment in the United States). CFIUS has stopped a string of acquisitions under President Donald Trump. Many have involved Chinese buyers of US technology firms.
Morgans analyst Derek Jellinek points out that given the US represents more than 70 per cent of Sirtex's earnings, it would be very unlikely that CDH would want to still pay a premium for the company if it were to be denied the US business.
Others say given Sirtex is an Australian company, with Australian intellectual property (not US IP), CDH is unlikely to hit any US regulatory issues. It obtained FIRB approval for its purchase of Tabro Meats.
Varian is playing hardball, and stated it will not be increasing its bid.
What is clear is if either of the bids fail to eventuate, Sirtex will slump. It is facing class actions, falling dose sales and uncertainty around its potential growth in most of its prospective markets.
The Sirtex Medical board has a tough call to make in coming weeks: back a higher, more complex takeover offer by Chinese private equity firm CDH Investments or go with the more secure, lower offer from a US trade player, Varian Medical Systems.
There is a lot to weigh up over the merits and risks of each bid, not just the cash price per share of $33.60 and $28, respectively.
Varian was dealt a blow last week when the court knocked back its attempt to re-convene a shareholder meeting for May 31 to vote on its offer for the developer of novel targeted radiotherapy devices for liver cancer. The court decided to wait until July 3, to consider if supplementary disclosures will be sent to shareholders, with a meeting to be re-convened later that month. This allows the Sirtex board, lead by interim chairman John Eady, more time to fully dissect the Chinese offer, even as it continues to back the Varian proposal in the meantime.
While many market watchers would be familiar with US-listed $US10 billion Varian ($13.1 billion), CDH is more of a mystery. But that is not a reason to discount the latecomer. If nothing else, the fact it is willing to pay a massive multiple of 23.6 times earnings and is prepared to cop a $200 million break free if Sirtex walks away from the Varian bid should underline the serious nature of its bid.
Leading the transaction for the $US17 billion outfit is executive director Alex Wu, who has worked for the firm for more than six years, and previously worked for Hong Kong-based CITIC Capital and The Boston Consulting Group. However, CDH chief executive and co-founder Shuge Jiao is keeping a close eye.
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SRX Price at posting:
$29.80 Sentiment: Hold Disclosure: Held
