Message to CFR: If you really want Adcock Ingram, make a cash offer. Don’t paint it political

Chilean group CFR’s proposed R12bn acquisition of Adcock Ingram is in the balance after South Africa’s public sector pension fund manager (the PIC), which owns 18%, announced it would vote against the deal as currently structured. CFR’s CEO Alejandro Weinstein jetted into SA this morning with the mission of turning the PIC around. The grandson of a Ukrainian immigrant who founded the business in 1922 told us last he knew, the company’s biggest single shareholder was on side. So what are we to make of all this? Many are speculating the PIC has been instructed, for political reasons, to block another underperforming SA asset falling into foreign hands. Maybe. My reading is that there’s a simpler solution. That the PIC, like some other shareholders, sees little value in owning CFR shares and wants a cash offer. Weinstein was unconvincing in response to my question why there’s no cash alternative. He’s sticking to the story investors told him they want to stay in. Maybe some do. But why not give those who don’t, including the PIC perhaps, a cash alternative? – AH

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ALEC HOGG:  Alejandro Weinstein, the Chief Executive of CFR landed just a few hours ago at the airport here in Johannesburg.  He’s come straight to the CNBC Africa reflecting his sense of urgency now.  Alejandro, the Public Investment Commissioner has said it is not going to support your proposal to acquire Adcock Ingram.  It’s been all over the weekend newspapers here in South Africa and presumably, from what was reported it was a surprise to you?

ALEJANDRO WEINSTEIN:  It was a surprise, but in our company, we use leadership as an expression to develop talent.  We go to the mountains and we used to say, “When the going is tough, the tough get going”, and this is how we are going to try to solve this situation.

ALEC HOGG:  It’s a big opportunity.  Adcock Ingram has underperformed for quite some time.  Perhaps you could explain to us what happened at your last meeting with the Public Investment Commissioner.

ALEJANDRO WEINSTEIN:  We have had three meetings so far with the Public Investment Company, and we have explained all the details of the possible transactions: in terms of the potential synergies, and how our proposal would solve the problems that Adcock Ingram has today.  How we are going to diversity the market, decreasing the foreign exchange rates that the company faces, and how we are going to fill up the capacity.  Today the facilities are running at almost 50 percent of their potential capacity, which are huge problems that a new management has to address in showing a turnaround. I cannot comment on arguments that are not about finances or economics, and getting into that specific field. You have to think; what are the alternatives that the company has today?

I can only think of four alternatives for the company.

1.  Status quo: stay as it is, meaning share price will go back to the 50s per share.

2.  Go to ACTIS, which is in the public domain as a potential bidder, which is a private equity and everybody knows – a kindergarten boy knows what private equity does to companies.  They reduce costs, change management, and solve them quickly.  This is a no-brainer solution.  This is a non-value added solution for a company like Adcock and a small kid can implement it.

3. Bidvest – they proposed a different solution, but I don’t see in the Bidvest information – at least the one that is in the public domain – I don’t see how they can create value.  This company is struggling for sales, for new ideas, and for new products.  How are you going to fill up the facilities?  How are you going to export?  How are you going to execute the Sub-Saharan strategy?  You have to be a strategic player in order to execute what this company needs.

4. CFR.

@alechogg isn’t it all about politics when the chips are down?

— Hugh Rivers-Moore (@hughfromhilton) November 11, 2013

GUGULETHU MFUPHI:  How are you hoping to unlock value at Adcock?

ALEJANDRO WEINSTEIN:  Well, the way I’m just describing: from moment zero we will bring products into South Africa to be manufactured in the new facilities of Adcock Ingram.  We will fill them up, and in that way, decreasing the average cost of production of South Africa and then re-export those products into emerging markets.  This is a solution that will fill the plants and increase the export for South Africa.  In order to fill the plants new jobs will be created.  In order to manufacture new products, new technologies should be transferred to those markets. So this is a really valuable proposition for this company.

ALEC HOGG:  Alejandro, you’ve obviously done your homework on this.  You’ve come to South Africa often.  There have been two recent deals that I’d like you to tell us your views on, and how they apply to Adcock Ingram.  The first one was Walmart – it’s acquisition of Massmart in South Africa, where it had to jump through many hoops to get that one done.  The second one was the proposed acquisition of a strategic interest by the Koreans in Telkom.  Both of those transactions…you saw a different, perhaps a more aggressive response from the government.  Did they not shape your thinking in your negotiations in any way?

ALEJANDRO WEINSTEIN:  I tend not to comment on what others do.  I try to focus on what we do.

ALEC HOGG:  The way the government handled those two?

ALEJANDRO WEINSTEIN:  The feedback – I’ll go there.  The feedback we have had from government authorities is very good on our value proposition.

ALEC HOGG:  Were you surprised?

ALEJANDRO WEINSTEIN:  We have had several interviews and meetings with the government officials.  We’ve been in this process for eight months, so of course we met many people, explaining to them our objectives, our long-term objectives regarding the company.  The feedback has been really positive, so that’s why you mentioned correctly that I was surprised when I received the information through the news on the PIC decision.

ALEC HOGG:  So how do you conclude this change of mind?

ALEJANDRO WEINSTEIN:  I would like to meet them in order to form a conclusion, because this is press information.  I haven’t met them after our last face-to-face meeting.

ALEC HOGG:  They issued a statement to say that they do not support you.  It’s not just press information.  It came from the Public Investment Commissioners themselves.

ALEJANDRO WEINSTEIN:  I would like to understand the reasons underlying that conclusion, because from an economical or financial point of view, I cannot see them, so they might be from a different dimension.

ALEC HOGG:  The resistance we did get from the investment community was that this is not an all-cash offer.  Why did you decide to do it that way?

ALEJANDRO WEINSTEIN:  Well, we decided to do it that way because we are willing to give the opportunity to South African shareholders to have exposure to an emerging market pharmaceutical company.  CFR is a growth company.  You can compare it, for example, to the Indian Pharma companies, or even here – Aspen.  A growth company grows at well over 20 percent per year in bottom-line, in sales, plenty of projects, going into new markets, and through Adcock they have exposure only to South Africa – 95 percent.  This is an opportunity for South African investors.

ALEC HOGG:  Fair enough.  Why not then give an option of taking the cash?  Why not have an option of an all-cash offer on the one side, or stay invested through CFR?

ALEJANDRO WEINSTEIN:  This is the way it was discussed with several potential investors, and we arrived at the conclusion that this is the way that they would like most.  This is the kind of support that we have had from Adcock’s private investors.

GUGULETHU MFUPHI:  Alejandro, what would it take you to withdraw the deal from the table?  Clearly, you’ve come here to show how serious you are, but what would it take you to change your mind?

ALEJANDRO WEINSTEIN:  If we don’t have enough support for the deal, or if I personally feel that a foreign investment in the pharmaceutical area that will create jobs, increase exports, and transferred technology is not welcome in this country, of course that could change my mind.

ALEC HOGG:  When you say ‘create jobs’, how many jobs will you be creating through your transactions?

ALEJANDRO WEINSTEIN:  We have done some numbers initially – it’s around the hundreds in the first year.

ALEC HOGG:  And that will be because you put more throughput in the factory?

ALEJANDRO WEINSTEIN:  Exactly, that’s a fact.  Then we will have to build up a research and development facility, in which Adcock is quite weak, in order to do all the pharmacological studies of the new drugs, so this is something that has to be built up from scratch.

ALEC HOGG:  One of the criticisms that Brian Joffe from Bidvest made, was that there is always transfer pricing and consequently, you could manipulate the figures.  Could you put guarantees on the table to the PIC and to the South African government that, that isn’t going to happen?

ALEJANDRO WEINSTEIN:  I don’t know Mr Joffe.  I respect his financial knowledge but I think he made a mistake in his statement.  Accounting 101: whatever the transfer price is, it will be consolidated within CFR, and CFR is going to be part of the South African shareholders, so it’s a mistake.  Anyway, there are international laws for transfer pricing.

ALEC HOGG:  Clearly, you got on a plane when you heard the news (that the PIC will vote against the deal).  You really want this deal to happen.  How high would you put it – as you sit there – in this actually being concluded?

ALEJANDRO WEINSTEIN:  100 percent of my effort.

ALEC HOGG:  Well, we wish you the best Alejandro Weinstein, with your conversations with the Public Investment Commissioners.  When are you likely to see them?

ALEJANDRO WEINSTEIN:  I don’t know yet.  I just learned of it, so I came through to be able to hear.

ALEC HOGG:  Well, we thank you for coming to CNBC first.