15 November 2013
Khotso Mokhele: My name is Khotso Mokhele. I stand here in my capacity as Chairperson of the board of Adcock Ingram. And it is indeed a pleasure and a privilege for me to stand here in front of you today. I want to particular express my appreciation. I did not know that journalists could in one hour’s notice assemble in these kinds of numbers. So I appreciate the fact that you were able to join us this afternoon.
I’m going to be joined in this presentation by Alejandro Weinstein, the Chief Executive of CFR, and Jonathan Louw, who is the Chief Executive of Adcock Ingram. So we will split the presentation between the three of us. The announcement went out at 14:15 this afternoon announcing that the boards of CFR and Adcock Ingram have unanimously approved an agreement whereby CFR will acquire Adcock Ingram for R12.6 billion.
It has been eight months of the board engaged in the process. We now have reached the stage where the transaction will now be subject to shareholder vote and regulatory approvals. Combining the two businesses would create one of the most diversified and best positioned emerging market pharmaceutical companies. Indeed for the independent board of Adcock Ingram and for the full board of Adcock Ingram this is a milestone achievement securing Adcock’s future in the global pharmaceutical market.
Throughout this process the independent board in particular has been focussed on delivering maximum value for Adcock shareholders. This transaction, if approved, will be one of the largest foreign direct investments in recent years, in line with the NDP and the national strategic objectives. This transaction creates and opportunity for growing Adcock Ingram’s business in South Africa and throughout the African continent.
At the same time CFR has its own plans of preserving and even growing jobs in South Africa through this transaction. More importantly, given that Adcock Ingram is a national icon of a company the preservation of it is also guaranteed. We are also delighted that the BEE partners of Adcock Ingram were able to reach agreement with CFR to facilitate this transaction.
It has been a long eight months since the fateful day in March 2013 when the independent board process began. Throughout this process as I stand here I have to indicate to you that I’m privileged to be on the board with the kind of directors who are assembled into the board of Adcock Ingram. We have all been working tirelessly and selflessly to get us where we are today.
The process was extensive, rigorous and we were determined as an independent board to be meticulous in our observance of law and regulations that govern processes like this. As indicated earlier, maximising shareholder value was at the top of the agenda, whilst at the same time protecting the interests of the company and other stakeholders.
We believe as an independent board and full board of Adcock that CFR delivers maximum value to shareholders and is best placed to execute and implement the transaction for the benefit of shareholders. The combination of Adcock Ingram and CFR provides a unique opportunity to create a pan emerging markets pharmaceutical business with exciting prospects for growth. As we stand here today we are delighted with the shareholder support that we have received, and together with CFR will continue to engage with all our shareholders so that where clarity is sought we will provide such, and where misunderstandings exist those will be corrected.
JP Morgan, an independent expert, has indicated that the offer is fair and reasonable. Therefore the Adcock Ingram independent board will recommend that shareholders vote in favour of the transaction. Ladies and gentlemen, thank you. I will hand you over now to Mr Weinstein.
Alejandro Weinstein (CEO of CFR)
Thank you, Khotso. Good afternoon, ladies and gentlemen. First of all, before I get into the presentation I would like to share a couple of personal things with you. The first one is that I’m very pleased to be in South Africa, a country that I know and my family knows for the last 15 years. This opportunity that Khotso has explained to you is filling me with energy. This energy I assure you is going to be invested – if the deal is approved by the shareholders – in transforming the combined company of Adcock Ingram and CFR into an international champion in the pharma industry. An emerging markets pharmaceutical company centred in South Africa with presence in four continents and exposure to more than 2 billion patients. The second personal thing I would like to share with you with from this press conference I have to rush to the airport, and I’m sure you will understand that. Thank you.
What are the key terms of our offer? We are offering to buy – excluding the BEE shares – 100% of Adcock Ingram’s issued ordinary shares at a price of R73.51 per share. This price represents a premium of 38% to the closing price of Adcock Ingram in the Jo’burg Stock Exchange as of March 2013. This also is made in a balanced combination between cash and newly issued shares from CFR. The minimum cash consideration will be 51%. The maximum stock consideration will be 49%.
[Break in audio].
Chile, Argentina, Peru, Colombia, Canada, South Africa, India, Bangalore and Vietnam. Employees of over 10,000 in four continents. With sales according to market consensus of about $1.35 billion in sales and almost $300 million in EBITDA. With a great diversification of sales in different markets, South Africa will be the biggest market with around 41% of total sales. The second market would be Colombia, and so on.
How are we creating value in our proposal? First of all, we think that we are offering an attractive valuation with a significant cash component. The valuation is 31% over the unaffected share price. There is a minimum of 51% in cash. The multiples we offer are high multiples in terms of the EBITDA of the company. I would say the multiples the company is offering to pay is among the top multiples paid in emerging markets and in the developed world for a pharmaceutical company.
Then number two, CFR will unlock value inside Adcock Ingram by increasing the utilisation of the new facilities of Adcock Ingram which today are running more or less at a 50% capacity, generating synergies for the combined company in net present value of around $440 million, creating access to high growth markets in Latin and America and Asia for Adcock Ingram’s products, and improving the product pipeline by combining the pipeline of Adcock and CFR.
Number three, our value proposition. We increase the number of jobs that Adcock Ingram is offering to South Africans in this country. We will increase the number of jobs on the production side. We will increase the number of jobs on the research and development side. And we will also increase the export of pharmaceutical products manufactured in South Africa into emerging markets. This company will also have broad-based black empowerment shareholders. Shareholders will benefit from all these things, as I mentioned before. We will increase the research [unclear]. We will have a diversified investment base with South African minority protection.
And finally, access to the new frontier markets like Colombia, which is an attractive investment environment die to the recently signed free trade agreement between Colombia and US. And South East Asian countries. Vietnam, which is an emerging middle class country where you can see lots of foreign investment taking place with big international brands. And finally Chile, which is ranked the best world economy to attract FDI last year, which had 32% increase in growth in [unclear] last year compared to a global decrease of 18%.
How will this emerging new pharmaceutical leader be? As I mentioned, it will have a unique position across emerging markets. It will have a total complementary portfolio, adding what Adcock Ingram has to the complete CFR portfolio of pharmaceutical products. And there will be significant synergies. No other combination of assets creates a company within emerging markets with the growth potential of CFR and Adcock Ingram combined. We will have presence, as you see there, from Latin America, Africa [inaudible].
So there is a unique potential for combining this pipeline with very few overlapping products. In terms of synergies this offering to shareholders has synergies in all dimensions. This offer has synergies at revenue level, at cost level, at investment level. At revenue level we expect synergies by bringing antiretroviral products of Adcock Ingram into Latin America, where we don’t have, in net present value of around $120 million. We plan to bring also the OTC products of Adcock Ingram into Latin America, creating another $80 million in net present value of synergies. And lastly, we plan to bring some Latin American complementary products into South Africa with synergies for Adcock of around $80 million. These are mainly the revenue synergies.
In terms of cost synergies we plan to move production from Latin America, shutting down facilities in Latin America, into South Africa, increasing the production, increasing the jobs, increasing the investment in these facilities. This is another $150 million in net present value in synergies. And finally, by combining the servicing [?] of the two companies we expect another $10 million to $20 million in synergies. John, now it is your turn.
Jonathan Louw (CEO of Adcock Ingram)
Thank you very much, Alejandro. Ladies and gentlemen, certainly it’s a great moment in Adcock Ingram’s history. And I’d like to start by thanking our chairman, Khotso Mokhele, who has been with us since the time we unbundled from Tiger Brands, and also the rest of our board for allowing us as a management team and as employees to spend close to R2 billion worth of shareholders’ funds in modernising Adcock Ingram, really in a sense putting up the bride to take us to the altar as we are here today.
Certainly if we had not invested to the degree that we had in making this company relevant to the global pharmaceutical environment and to the national priorities that South Africa has in terms of treating HIV/Aids and other communicable diseases, and seeing that the population has access to the very best medicines coming out of both our critical care facility as well as our FDA approved antiretroviral facility in Wadeville. The patience of our shareholders, the patience of our board and our employees’ relentless ability to execute has brought us to this day here today.
As I said, almost R2 billion has been invested in upgrading those facilities, and from that much of the synergies with CFR are evident today. Once we had invested in these facilities we started our own acquisitive journey as far back as 2009 with the acquisition of the Ayrton business in Ghana, and more latterly the Zimbabwean business in [unclear]. And we have grown our Indian footprint as well through the acquisition of Cosme. Compared to the transaction today of course these are small.
One of the strategic quandaries that the Adcock Ingram board has faced over time is how to compete in an ever-more competitive environment, both in South Africa and in the global environment. Certainly what we have now is a business that when combined with CFR will be extremely competitive in emerging markets. We will have the manufacturing base, we will have the product base and we will have the people to be an extremely successful combination.
So certainly when we look at the groom today, CFR, certainly as I said the combination will allow us access to a great many markets for the products we have in Adcock Ingram, that wonderful flagship OTC brand, the antiretroviral portfolio that we’ve built, and of course many of these injectable products that we will now have critical mass for that will generate far more substantial synergies and savings over time and increase the sustainability of Adcock Ingram for all its shareholders.
We do believe that Latin America offers greater growth prospects than perhaps we’ve been able to enjoy today, as does South East Asia. The combination, as Alejandro has said, speaks to that. The cost synergies and the manufacturing and product synergies of close to R4.5 billion have been quantified by both management teams. They’re real and we believe that we can achieve them.
I would like to take this moment to thank Alejandro and his team for their persistence in pursuing Adcock Ingram. I believe that it is a combination that in the long run will certainly benefit CFR and will certainly take this emerging markets player to ever-greater heights. So thank you, Alejandro, and to the CFR board for having faith in Adcock, its board and in the management team to get us here today. Thank you very much.
Alejandro Weinstein
Just a couple more words. I read in the press this week a question, who is CFR? Let me tell you a couple of facts about CFR. First of all we are a 95 year old company, diversified in around 20 countries, with a broad base of shareholders from the US, from Europe and from Latin America. When you compare CFR to the champions of emerging markets in terms of revenues the CAGR of CFR is among the top. I put Aspen, and then I would put the three Indian companies in the pharma industry. You can well compare CFR in terms of the best companies in terms of compound average growth rate in revenues, compound average growth rate in the last five years in EBITDA, and in the last year we have been the highest growth in terms of revenue in 2012 to 2013 with a number of 37% measured in US dollars. So thank you again, Khotso. Thank you again, John. I would like to invite all Adcock Ingram shareholders to be part of this dream, to be part of this future of a company with a stronger presence in the southern hemisphere. This is the way we should see the world in the near future. Thank you very much.
Khotso Mokhele
We can take questions then.
Chris Spillane
Chris Spillane from Bloomberg News. There was a number of 45% for shareholder support. That was in a SENS announcement recently. That number is not visible on any of the documentation today. Why is it not there?
Male speaker
We spoke with the PIC very shortly after the announcement came out. They said they won’t be supporting the offer in its current form. Do you have a response to that?
Khotso Mokhele
From the beginning of this transaction – and this takes us back eight months – we have been quite engaged with all the shareholders. That engagement will continue, so we will be engaging with the PIC further as we will other shareholders of the company. I’m confident that this engagement will yield a favourable vote for the transaction. I suppose PIC is best placed to indicate what its main opposition is.
Female speaker
There was talk in the media this week that you’d actually met with the PIC. Is there any indication of what the meeting was about?
Khotso Mokhele
We are aware that the PIC has confirmed publicly that that meeting has taken place. That was a meeting between CFR and the PIC. And this is one of the ongoing engagements to create a path towards finding [unclear].
Male speaker
Mr Weinstein, you said this week that the PIC support is crucial for this deal and you may have to look elsewhere for other investments in emerging markets if you don’t get support from the PIC because you see it as part of the government. Is that still the case that if you don’t get the support you will walk away from this deal?
Alejandro Weinstein
I will reprise the words that Khotso has just said regarding the PIC.
Andile
Thanks. This is Andile from the Financial Mail. I have a question for Alejandro. Would you take anything that is less than 100% but above 50% in the even that you don’t get all the shareholders supporting this deal?
Alejandro Weinstein
I would take exactly what it is in the firm intention announcement.
Female speaker
When are shareholders due to vote on the deal?
Khotso Mokhele
Anticipated around 18th December.
Female speaker
What was the reason that it took so long to get the firm intention on the table? A lot of your shareholders were concerned that it took so long.
Khotso Mokhele
As we have indicated in Alejandro’s presentation the engagements we had to undertake were not only with our own shareholders. As indicated by Alejandro we had relationships that had to be attended to, and those took quite some time for us to get [unclear] all of them, as Alejandro indicated. So those engagements were quite interesting engagements, but we are delighted that we stand here today with agreements from those key partners in Baxter.
Male speaker
[Inaudible question]. I just want to get clarity.
Any Hall [?]
The 45% represents total shareholder support. In terms of shareholders that can vote at the meeting the number is 37%.
Khotso Mokhele
And also 37%, as indicated earlier, we have 29% who have irrevocable undertakings. Then 7.5% which have not given an irrevocable undertaking, but today gave us the authority to mention their names as a shareholder. So 29% plus 7.5% takes us to the [37%.
Chris Grundberg
Chris Grundberg again. Just a follow-up for Mr Weinstein. How many meetings did you have in the end with the PIC? It seemed like you flew over here with nothing in the diary with the hope of having these. How many did you have in the end?
Alejandro Weinstein
I have had three meetings before this week.
Carol Roos [?]
I think we might be done. Any more questions? There is one over there.
Alec Abraham
Alec Abraham from Afrifocus Securities. When do you envisage the final mix between cash and shares will be known?
Alejandro Weinstein
It will be known at the date of the voting of accepting CFR, which is between December and beginning of January.
Alistair Anderson
Alistair Anderson, Business Day. I’ve just got one question. If this does go through what happens to the management structures of the two companies? Are they affected at all? Not just employees, but actual management? Will both of you be in your positions going forward?
Alejandro Weinstein
We have said to shareholders that every management of the two companies has an opportunity to show that they can create value in the direction I mentioned in my presentation.
Carol Roos
That’s it. Are there any questions from the webcast that haven’t been answered already?
Operator
There is a question from the conference line. I have a Mr James Vane-Tempest of Jefferies. Please go ahead.
James Vane-Tempest
Good afternoon. Thanks for taking my question. I just have a quick question on synergies for you, if possible, Alejandro. The synergies have been quantified. You’re saying how much you think they’re worth. My question is what is the annual profit you’re targeting and how many years you think you’re going to take to reach that level. And can you give us a sense of integration costs in the first couple of years, how much you think they will be, given you’ve been able to quantify the total value you expect. Thanks.
Alejandro Weinstein
Hi James. Unfortunately I cannot answer that question at this moment in time. I know there is a press conference in CFR right now and they may answer part of it.
Carol Roos
I think perhaps we should wrap it up so that Alejandro can get to his flight on time. Thank you very much everyone for coming. I hope you found it very useful. Thank you.
