Brookfield has room to sweeten Spanish drug deal
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Yawen Chen
LONDON, Nov 20 (Reuters Breakingviews) -One of Europe’s largest buyouts this year may need a shot in the arm. Beleaguered Spanish pharma company Grifols GRLS.MC has rejected a 6.45 billion euro non-binding offer from Canadian private equity house Brookfield BN.TO, claiming it significantly undervalued the firm. On closer look, Bruce Flatt’s investment group can indeed afford to pay more.
Shares of Grifols, which produces plasma-derived therapies for conditions such as immune deficiencies, have more than halved in the last two years, amid high debt risks and a short-seller report in January that raised financial reporting and governance concerns. That resulted in sweeping changes including the removal of all members of the founding Grifols clan from management positions. The family, which owns about a third of the company, and Brookfield, have been evaluating a possible joint takeover bid since July. The initial offer values Grifols at just under 9 times expected 2024 EBITDA including debt.
The board is probably right to assume it deserves better. Grifols's EBITDA grew at an annualised rate of less than 1% between the year of 2019 to 2023, partly due to the pandemic. But growth is expected to pick up to 8% in the next five years, using Visible Alpha estimates, thanks to robust demand for immunoglobulin products. That would help reduce the company’s net debt further, which has already fallen by over 1 billion euros in the past year to 8.1 billion euros by September.
That gives Brookfield some wiggle room. Assume the Canadian group raises its price by 20%, bringing the total outlay to around 16 billion euros including debt. Next, imagine Grifols hits analysts’ targets of 8% EBITDA growth each year, and Brookfield sells in five years at the same 10 times EBITDA multiple, implying a valuation of 23 billion euros. That would deliver a return of over 20%, according to Breakingviews calculations that assume capex of 525 million euros a year, and debt financing of 6 times EBITDA. The return could even be higher: as recently as May 2022, Grifols was valued at 16 times forward EBITDA. Brookfield can be a little more generous.
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CONTEXT NEWS
Spanish drugmaker Grifols said on Nov. 19 said it rejected Canadian investment fund Brookfield's non-binding 6.45 billion euro ($6.8 billion) offer, saying it significantly undervalued the company's prospects, according to a statement it issued after market close.
Earlier on Nov. 19, Brookfield said it was considering a public offer for Grifols at 10.50 euros per A share and 7.62 euros per B share, implying a company valuation of 6.45 billion euros, according to a filing to the Spanish stock market regulator.
Brookfield said in July it was interested in making a takeover bid jointly with the Grifols family with the ultimate goal of taking the company private, according to Reuters.
Grifols shares rose 1% to 10.5 euros as of 0833 GMT on Nov. 20.
Grifols' share price has halved since 2022 https://reut.rs/3ZcM8HB
Editing by Neil Unmack and Streisand Neto
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