Not home and hosed. Adcock directors backing Chileans – but watch out, here comes Joffe
Bidvest founder Brian Joffe threw his hat into the Adcock Ingram ring a few months ago when proposing to its board they support his proposal to bring the pharma group into his empire. The Adcock board took umbrage, dismissed his offer as "opportunistic" and opened up the business for pther bids. Three months later, and after everyone who wanted to got the chance to see inside Adcock's drawers, the directors have plumped for a family-controlled Chilean outfit called CFR. This is a very instructive interview. Independent director Andrew Thompson, formerly joint MD of pulp and paper giant Mondi, leaves little to the imagination. He really likes the Chilean company, believes it is the best fit for Adcock and reckons this is the key to turning the group into a serious global player. So far Joffe has kept his power dry. But as our recent interview showed, he has the R12bn or so needed to buy Adcock – and the incentive as he believes the business is sleepy and would benefit from entrepreneurial energy. Thompson is clearly hoping this is the end of the "in play" saga. I've got a feeling it's only the beginning. – AH
ALEC HOGG: Well, the story of the moment is the proposed acquisition – and it is still just proposed at this stage – of CFR which is a Chilean business, of Adcock Ingram. Which is one of the longest-standing names in the South African pharmaceuticals sector. Andrew Thompson, who is the Independent Director at Adcock Ingram, joins us. He's in the studio with us. A non-executive Director, so you can talk on behalf of the independent grouping on the Board who've had the chance to look at this offer from the Chileans and to assess it. I suppose the headline is you think it's a good offer?
ANDREW THOMPSON: Yes, Alec, Thanks very much. We, as you know, have a non-executive Chairman who unfortunately can't be here today. He's busy briefing other stakeholders but I'm very happy to talk about the deal. I think probably to do justice to this it's worth going back a little while. You will remember in March we had a proposal from Bidvest. Commentators described it as opportunistic, with which we agreed. We published that in full and we also analysed it thoroughly and in early April we gave our views on it which we communicated to shareholders. The view of the shareholders was not that we should have accepted that willy-nilly, but they did want us to engage with interested parties potentially, in a transaction to change control of Adcock Ingram.
ALEC HOGG: So with Brian Joffe making the bid or the suggestion in the first instance it started changing the way that you looked at the future of the business?
ANDREW THOMPSON: I think it's fair to say it was a catalyst. We had been through a period since unbundling of a lot of investment. We've capitalised something over R1.6bn but I think if one takes the expenses and the disruption, the number is probably north of R2bn that we've invested in modernising the business. That's the factories, logistics, IT and until we'd done that we really couldn't think too much externally from a strategic point of view and earlier this year was due time there. So yes, that was a catalyst for us to start thinking much more clearly on the outside. We had done some small acquisitions up in Africa. We have a business in Ghana and in East Africa and most recently, a big acquisition north of R900M acquisition of Cosme Farma in India. Anyway, into that situation was the Bidvest proposal and then in April, May and June we had what I'll describe as open season where we entertained expressions of interest from anybody and everybody who was interested in Adcock Ingram. We did – and I make this point – require some non-disclosure undertakings because we owe it to our shareholders and our company to protect confidential information and that was an interesting and wide-ranging process. We spoke to many, many people. Some of them I think just had notebooks and came and had a look around and then moved off, but there was quite serious interest from several parties and we engaged with them and refined their proposals into a situation where we wanted to make a choice. And time is your enemy in a way, in these situations. Open-ended periods are not satisfactory for shareholders., they represent uncertainty. So we took a view – carefully considered at the end of June – that CFR represented the preferred offer in this process.
ALEC HOGG: Why preferred?
ANDREW THOMPSON: Well, I think we were fortunate. I had not come across CFR until the earlier part of this year but they're as you know a Chilean company, but they've established businesses in many countries; in South America and in Central America and more recently Canada. They have a small business in the UK and they recently established a foothold in Vietnam. They also have therapeutic categories which, fortuitously, correspond very nicely with ours so there's not that much overlap – on the contrary, good complementarity. They have a good record of bringing new products to market in Latin America, something which we feel we can learn from. And from the manufacturing point of view they view our factories as an attractive additional string to their bow where they have highly-developed market positions where they can use additional manufacturing capacities.
ALEC HOGG: But you would have thought, if you've got a business for sale – and this is where the criticism comes in from the investment community – 'just get us the best price'. It appears as though, well certainly the perception is this deal is being driven by management and then the Board.
ANDREW THOMPSON: Well, let's deal with that last point. Survival of the management has not at all been a driving consideration here. We were driven by value and transparent price – certainly – in that. But as I say we had three months where frankly I'm pretty sure that everybody in the world healthcare industry knew that Adcock was in play and came and had a look. And so, in a very rational process, they offered the best proposal.
ALEC HOGG: The best price?
ANDREW THOMPSON: Well of course getting to where we are now we have a cash and shares proposal. But more than half as a bare minimum in cash and then subject to this pre-emptive process, which is a minority protection in Chile, a share proportion which will be the balance. So between 49% and about 35% will be in shares. Today the see-through price – taking spot prices – is around R75.00, in fact over R75.00 for that. So that relative to where we were in March is an attractive evaluation.
ALEC HOGG: But is it the best price that you were offered?
ANDREW THOMPSON: On our valuation metrics – just taking into account the share proportion – absolutely.
ALEC HOGG: So the other offers, or the other people who were sniffing around were not in a position to equal or better?
ANDREW THOMPSON: Inferior valuation and with nowhere near the synergies that we've spoken about in this transaction. And therein is again a fortuitous outcome here where an all-cash offer is at the end of the day quite a good default against which to compare. But the opportunity for Adcock shareholders to participate in an enlarged group with synergies that CFR have estimated are around USD440M; that's a very significant number.
ALEC HOGG: The shareholders we've spoken to and those who've come onto this program say they don't actually care about CFR. They don't want CFR shares. They just want cash and it is not an attractive proposition to them to not have any shares whatsoever. Is there a cash offer or was there a cash offer from anybody else – a pure cash offer?
ANDREW THOMPSON: There was interest with largely cash portions but nothing that was unconditional to be honest, so this is definitely what we regard as the best valuation. But let me also say [that] we accept the challenge to persuade our shareholders to support this deal and that's what we'll be very busy with.
ALEC HOGG: But why do you see it as a challenge? Surely you should be independent as a Director of the company?
ANDREW THOMPSON: Well, if we're supporting a transaction and a pre-condition of this is sufficient shareholder support. So we will not be formally proposing this unless that support is there.
ALEC HOGG: You've been through it. You think this is the best deal for the company and for shareholders. What about Brian Joffe's involvement here? He, in a conversation I had with him which we aired on this channel, was quite dismissive of the approach the Board has taken. He said it's not up to you to make the decision. Shareholders will make the decision.
ANDREW THOMPSON: That's interesting and there's been some colourful commentary on this particular matter. I could just go back to what I said to you just now. His proposal was highly conditional. We printed it in full in our SENS and we explained it in full to our shareholders and the shareholders that we spoke to at the time were comfortable in the approach that we took.
ALEC HOGG: Is your door open to discuss with Mr Joffe?
ANDREW THOMPSON: We have non-solicitation / deal protection undertakings in favour of CFR, but he has his rights in terms of the Company's Act to approach our shareholders and we of course have obligations not to frustrate such an offer if he decides to make it.
ALEC HOGG: Have you agreed to a break fee with CFR?
ANDREW THOMPSON: I would not describe it as that but there are protections for expenses that have been incurred in the transaction, but it's not something that I would describe as a 'break fee'.
ALEC HOGG: So if Brian Joffe were to put a bid on the table; shareholders, or you as the directors, would then assess it in the same way as you've assessed the CFR bid?
ANDREW THOMPSON: Correct.
ALEC HOGG: And if it is better would you recommend this one?
ANDREW THOMPSON: We understand our obligation to evaluate any fresh proposal that comes to us, whether for a scheme or for a general offer to shareholders.
ALEC HOGG: Have you engaged at all with the guys from Oasis? They've been the most outspoken about why they don't want the CFR and they seem to be getting quite a lot of support.
ANDREW THOMPSON: Ja, we have had some correspondence with them. We are comfortable with the position that we've taken. We can't necessarily make every shareholder happy. And for Oasis perhaps, who are not supportive, there are many others – and way more in percentage terms than Oasis – who are fully supportive.
ALEC HOGG: So do you have any of those commitments from other shareholders?
ANDREW THOMPSON: Not irrevocable, but we will be looking for that in the next weeks. That's one of the tasks that we've set ourselves in the period between now and when we, if we put a scheme to shareholders.
ALEC HOGG: So the process from the Board's perspective is; have a look at the offers that have been. You think this is the best of the offers? You're supporting it as the independent directors on the Board and you would like to see the shareholders accept?
ANDREW THOMPSON: Yes. I mean, let's just throw in one important thing. JP Morgan are the independent experts and their final view on this will be important and that will guide us, but I'd like to think that if they endorse the mechanics of the deal and the value metrics, then that will lend weight to our case to support it.
ALEC HOGG: Andrew Thompson, Independent Director from Adcock Ingram. Thank you for coming into the Power Lunch studio today.