CFR betting the house on “business logic” of Adcock bid; sends in its Harvard MBA, London IR heavyweight
It looks like the strain is starting to tell on CFR, the Chilean bidders for Adcock Ingram. This morning the company sent the Executive President of its Speciality Pharma operations to CNBC Africa as the respondent to our interview yesterday with their opponent, Bidvest's Brian Joffe. For one thing, Harvard MBA Daniel Salvadori has a better command of English than CFR's CEO Alejandro Weinstein. For another, he was brought into the group last September to expand its the global operations – so is the most likely person to have hatched the Adcock acquisition plan. And the charming, measured and extremely logical Milanese Salvadori showed in our interview that he is pretty adept at throwing smoke screens. The old bullshit baffles brains approach. Listen to his responses, for instance, to the put option which CFR has granted its BEE shareholders; his wriggling around the $400m synergy benefits; and how he handled the fact that the CFR share price has fallen from 140 Pesos in October to just below 120 Pesos. There were other signs that worries about their bid not succeeding. The Credit Suisse rep who was among Salvadori's "aanhangers" this morning's expressed concern that we might remove "important bits" before flighting the interview. One presumes that's a result of shameful ignorance rather than the insulting way it came across. College Hill London director Mark Garroway was among the posse, brought in to support the local team. After the CNBC Africa interview Salvadori left for another meeting with the Public Investment Company , the "king maker" as he describes Adcock's biggest shareholder. You have to like his business logic. But whether that's going to be what really matters here is debatable. The key question the State's pension fund will be mulling is whether a Chilean takeover supports its "Developmental State" ideals. And were the transaction to succeed whether the PIC is able to exercise any influence over the South Americans. And, perhaps most importantly, how the PIC can bring itself to vote for a foreigner against the obvious interests of a local Champion (Bidvest) in which it is itself the biggest shareholder. – AH
ALEC HOGG: The Chilean pharmaceutical group that's bidding for Adcock Ingram (CFR) has questioned the motives behind the counteroffer that was launched on Monday morning by Bidvest, saying the offer was good for Joffe but made no sense to Adcock or indeed, for South Africa. Daniel Salvadori, Executive President Speciality Pharma at CRF Pharmaceuticals joined us earlier this morning. Here's that interview.
DANIEL SALVADORI: We think that our offer is really compelling for South Africa. We've heard a lot about foreign ownership for instance, but we think foreign ownership in this case, is really the solution for Adcock Ingram and is very positive for South Africa. If you look at what are the three key areas of performance in Adcock Ingram, they have sub-optimal utilisation of their plant. They have an issue with the pipeline, which is key to being successful in pharmaceuticals; they're very exposed to one big market, and obviously, the volatility of the rand. We fixed all of that. Firstly, we opened Adcock Ingram to many new markets. We presently have more than 15 markets in Southeast Asia and in Latin America (1). (2) We bring product to be produced here in South Africa. That creates employment. (3) If you produce product here and then export it back – and we sell the Adcock portfolio in Latin America – we could create export in US dollars. By doing these three things, I don't think we only solve the issue for Adcock Ingram, but we do things that are good for South Africa.
ALEC HOGG: I get it. I think everybody gets that. It's a compelling case and a compelling argument, but the real world works differently. The real world works in this situation: you come into a country where one of the heroes of the business environment who has a company four times your size, made the initial bid. Surely, you didn't think Joffe was going to lie down.
DANIEL SALVADORI: Well, it's very difficult to fix Adcock Ingram if you don't have the synergies, and the synergies are really the key for this deal. You need to fill up the plants. You need to bring pipelines. In pharmaceuticals, 10/20 years ago there used to be 10/20 different competitors. Look at the world today. There's been a huge consolidation, so if you don't have multinational skills, if you don't have a complete buy plan and if you don't run at optimal capacity you will not fix the asset. You will cut jobs, which is not good for South Africa. We want to create jobs, not just in manufacturing but also in R&D. For us, the rationale of the deal is so compelling that we didn't expect such hostility. Joffe's offer is not a comparable offer in our view, because we have made an offer for 100 percent of the company. He has made an offer for 30 percent of the company. He said his offer is superior. Well you know, mathematics is a science, not an opinion. Our offer is a 73.50 and the true value is 75.76.
ALEC HOGG: Is that CFR's current share price – 119? It was 140 in October, so your own shareholders are saying 'we're not so sure this is a great idea'.
DANIEL SALVADORI: Our shareholders are extremely supportive.
ALEC HOGG: Why has the share price fallen, then?
DANIEL SALVADORI: There is not really much that you can say. There is a lot of volatility because the stock is not as liquid today, but the shareholders are extremely supportive. In fact, if you see the shareholder response that we have gotten, it's extremely positive.
ALEC HOGG: But then you would have expected the share price to have gone up since October.
DANIEL SALVADORI: The share price actually went up when we announced the deal, so it was a very positive reaction. Actually, when you announce a deal in pharmaceuticals, the share prices go down. The share price of the acquirer goes down, but we got a very different reaction. Our shareholders are into the asset, the share price has held, we get very positive feedback, our offer is 75 and synergy, which is R6.00 per share versus 70 and for 100 percent of the company.
ALEC HOGG: Daniel, the share price hasn't held. It's gone from 140 to 120. In fact, yesterday was 119. That's not holding. That's going down. Let's get into the real nub of what's going on here. Joffe will now vote on the 6 percent share he currently has, and the PIC will vote 19 percent – that's 25 percent. You need either Joffe or the PIC. Clearly, you're not getting Joffe. Are you comfortable that the PIC is on your side?
DANIEL SALVADORI: Look, all shareholders are important, but clearly, the PIC is the kingmaker. Now, the PIC holds 16 billion dollars in Bidvest and less than two billion in Adcock Ingram, so they hold eight times more, but we are confident in their integrity. We are confident that they'll do the right thing for all of Adcock Ingram shareholders, we continue to engage with them, we want to convince them, and we believe we can convince them that foreign ownership is positive for South Africa. It will create jobs. It will create a 600 million dollar foreign direct investment. It will create a US dollar denominated export, and it will create a sustainable local pharmaceutical industry, which you cannot create if you don't fill up the plant, you don't bring product, and you don't create an R&D hub, which is what we want to do. So jobs, foreign direct investment, US denominated export: we believe this is a very good proposition. Foreign ownership is good.
ALEC HOGG: So you're sticking with the business case, as it were.
DANIEL SALVADORI: Absolutely.
ALEC HOGG: This is what is good for Adcock Ingram.
DANIEL SALVADORI: And for South Africa.
ALEC HOGG: Joffe is saying Aspen Pharmacare has shown that it – since the founding in 1997 – can be an even bigger company than CFR. Why not give him the chance to do the same thing with Adcock Ingram, which has been around for nearly 100 years?
DANIEL SALVADORI: I'm glad Mr Joffe brings that up, because if you look at what Aspen has done, Aspen has opened up multiple markets. It takes a long time, a lot of expertise, and a lot of money to do that. When you started doing it ten years ago, the world was a different place because there were many more companies and it was much more fragmented. Today, if you were to come into Latin America to build up the infrastructure… I'm not going to say 'impossible', but very, very hard, and it would probably take 5/10 years and a lot of money invested in order to achieve that market penetration. We give that to the shareholders from Day One, and that is why the synergies – and I know Mr Joffe says we have 400 million dollars in revenue, but that's not right – its 400 million dollars in net present value of incremental cash flow. That's an important distinction.
ALEC HOGG: Let's unpack that, because that was really the nub of his argument. He said you had claimed 400 million in synergies – dollars, that is. He said that CFR was going to get the major benefit of it, but you hadn't said over what time. Was it revenue? Was it profits? Nice and slowly…unpack it.
DANIEL SALVADORI: Sure, so its 400 million dollars in net present value of incremental cash flow from revenue that would come from synergies. When we speak about synergies, we recently did – a year ago – a deal, where we acquired the number one company in Colombia. We promised the market 200 million dollars in synergies. Less than a year later, 80 percent of those synergies have already been delivered, which is why our shareholders are supportive of this deal. How did we deliver those synergies? We did it by doing the same thing that we are promising shareholders to do now. We take CFR's portfolio, register it in Colombia, take the Colombian company's portfolio, register in the rest of the CFR countries, and here we're saying we're going to do the same. We're going to take the Adcock portfolio, register it, not all of it, but a selected group of products, into Latin America. We're taking our portfolio, registering here, transferring product to be manufactured here as we did to Colombia, and we transfer product into the Colombian facility. If you look at how we're going to achieve 400 million dollars in net present value – which I want to stress again, Alec – it's an extra R6.00 per share. That would therefore get the offer above R80.00 in terms of total value. Those things that we say we're going to do are things that we've already done.
ALEC HOGG: So you have the model. You're a smart guy. You went to Harvard, you got an MBA from Harvard, and you joined CFR about a year ago – just over a year ago. Were you the man who drove this idea to come to South Africa initially when Adcock said 'we'll show you under our drawers'?
DANIEL SALVADORI: I think this was a group and team effort, obviously led by Alejandro Weinstein. We did take a look back in October of 2012, to the world of existing available assets. Adcock Ingram obviously made the screen. At the time, the company was not for sale, but when we looked at the world, when we looked at what we were trying to create, and we looked at the opportunity in pharmaceuticals it was clear to us. If you want to be a global leader in an emerging market you have to be a player in the Southern hemisphere and to be a player in the Southern hemisphere, you cannot skip Africa. We had a presence in Southeast Asia, we have a strong presence in Latin America, and we want to be a player in Africa. Three or four months later, Adcock Ingram came to play, so obviously it was already up on our radar screen. I then obviously made a trip with Mr Weinstein and we've been leading the work since then.
ALEC HOGG: When you joined CFR, was that specifically…?
DANIEL SALVADORI: No, I didn't join to…
ALEC HOGG: Not for Adcock, but was that specifically to globalise the company more?
DANIEL SALVADORI: Absolutely…to help Mr Weinstein…
ALEC HOGG: And are you based in Miami?
DANIEL SALVADORI: I am…I'm actually based on planes. I travel a lot, but in theory, I'm based in Miami.
ALEC HOGG: So you came into South Africa, you saw that somebody had already made a bid, and yet you didn't go and talk to him.
DANIEL SALVADORI: There is a process that was started. This is public company. There is a process that was started by Deutsche Bank, and in that process, all bidders were given a chance to look at the company and obviously, there was a timeline. You had to look at the diligence in the data room, do your due diligence, visit the site, do your work, and submit an offer. We just stuck with the timeline/with the process, as it was coordinated. That's how you do it when public companies…
ALEC HOGG: Did you do your homework? This is a highly politicised country – extremely so. Surely, you would need to takes those kinds of issues into account. Why are you surprised?
DANIEL SALVADORI: Which is why, for instance, we have retained black empowerment ownership, and we're committed to potentially increase that stake in the future, which is why we have engaged with the government, and the government has shown very great support for our deal on the merit that I've shown before on the synergy. Why can we fix the issue? Why is it good for South Africa? This is why we have engaged and will continue engaging, with the PIC.
ALEC HOGG: Anna Mokgokong, Brian Joffe's partner is abroad at the moment, so she wasn't able to come onto our program, but I have been engaging with her. She said 'we are, by far, the biggest black-owned Pharma company in the country' – three manufacturing plants that we operate. Why did you not talk to her?
DANIEL SALVADORI: Again, as I said before, the key for success if you want to fix Adcock Ingram is creating pipeline, filling up the manufacturing plant, exporting and opening up the new market: those three things we can bring to the table. We believe we have a compelling proposition.
ALEC HOGG: But why didn't you to her? If you're going to a foreign country – firstly, it's very hard. They speak a different language, not to you but certainly to Alejandro. You can see that. Secondly, it is the different things that happen in a country like this: highly politicised, BEE is a big issue… Did you do your homework? That's really the big question if you look back.
DANIEL SALVADORI: I think we did, Alec. I think we have a good value proposition on the table. As I said before, it's a superior offer, it's for 100 percent of the company, it has synergies, and it will bring very positive elements. Foreign investment is good for South Africa. Foreign ownership is good for South Africa and for Adcock Ingram.
ALEC HOGG: You mentioned BEE. I'd just like to clear something up here. The existing BEE shareholders: do they have a 'put' that they can sell these shares to you after the deal is concluded?
DANIEL SALVADORI: Some shareholders express preference for some increase in liquidity on the completion of the deal. We've heard that, and we've created a structure that enables some of them to get some increased liquidity. However, I think what really matters, is we are committed to preserving the current ownership and increasing it over time.
ALEC HOGG: So they want increased liquidity in their cash – in their bank balances. They want cash in some of their shares, as well.
DANIEL SALVADORI: They want to have an option to have partial liquidity. We have accommodated that, but the key thing that I think matters is that consequently, the black empowerment ownership will not change, and will not go down. Eventually, over time, we are committed to increasing.
ALEC HOGG: What about you, are you going to stay based in Miami, or would you come here?
DANIEL SALVADORI: No, I will be based in Miami, helping with the Latin American business. I think Mr Weinstein is sad. He envisioned running Africa as a separate region. Latin America will be one region, Africa will be one region, and Southeast Asia will be another. I think this is an important point, if you'll allow me. We're not the kind of multinational that will come here, take off the Adcock Ingram logo, put our logo on, change the email addresses, and impose its culture. You may note if you go on our website, we don't have a head of HR and that is by choice. We don't feel that someone sitting in Miami or Chile should impose HR policy. We respect the local realities. We empower the local realities. We want to preserve the Adcock legacy. We want to bring synergies, we want to bring jobs, and we want to grow Adcock.
ALEC HOGG: What about management? This is a company, which re-listed in 2008. The current profits are lower than they were before they re-listed. Clearly, management has failed. That's why you guys are interested. Are you going to keep them?
DANIEL SALVADORI: Management will have a new strategy, a new infrastructure, and a chance, and everyone deserves a chance in life. Yet, I want to be very clear. South Africa will be our number one market – 40 percent of combined company revenue. We will get it. We have to get it right. We cannot fail to deliver the synergies, so we will make sure that the 400 million dollar net present value will be delivered to shareholders in due time, and there we will work relentlessly to achieve what we promised.
ALEC HOGG: Well, the managers are going to be very wealthy, so they won't stay on. It doesn't really matter to them, given the incentivisation that they've had from the current board. Just to close off with, how would you rate your chances of success? You've seen the cards on the table. For some of us outside, we say 'well, if the PIC votes with you, you're home free. If the PIC goes against you, you have no chance'.
DANIEL SALVADORI: Look Alec, the reality is that PIC is the kingmaker. As a matter of fact, right after this interview we're going to Pretoria to see them again. We trust their integrity. We trust they'll do the right thing. I don't know if that means abstaining or voting, given that they have ownership in both Adcock and Bidvest, but we trust they'll do the right thing and we trust we can convince them that foreign ownership is good and it's the solution for Adcock Ingram.