Stories
Smelling blood, the activist investor Elliott Investment Management took a 3.1 per cent stake in UDG Healthcare this week.
Elliott has a tough reputation. The Elliott playbook is to find companies that aren’t doing everything possible to maximise returns for shareholders, buy a stake in them, and agitate for change.
What has attracted Elliott to UDG is the offer for the company by the august New York private equity fund, Clayton, Dubilier & Rice (CD&R). CD&R offered to buy UDG for an enterprise value of €3.2 billion. That’s a premium of 21.5 per cent over the market value, and a multiple of 17.2 times Ebitda.
Most of the time, an offer to take a company private at a 21 per cent premium would be gladly received by shareholders. But that’s not what has happened here. UDG’s single biggest shareholder, Allianz Global Investments, isn’t happy with the proposed deal. In a statement this week, it said “the offer is opportunistic and significantly undervalues UDG and its prospects and is not in the best interests of shareholders.”
Seeing an opportunity to ally with Allianz to squeeze more money out of CD&R, Elliott has jumped in. The question is whether CD&R will pay up.
Ballina world-beater
Before the argument over what UDG is worth – what does it do?
UDG started out in Ballina in 1948 and grew to be Ireland’s biggest drug wholesaler. In 1989 it listed on the Irish stock market, and in 2000 it started to aggressively grow through acquisitions. Between 2000 and 2015 it did a total of 23 deals. In that time, it evolved from its traditional drug supply business into a healthcare communications business and packaging manufacturer.
In 2016, UDG sold its original drug supply division to the US giant McKesson for €407 million. That left the rebranded UDG Healthcare as a healthcare communications, sales and packaging business. Since then, UDG has made 14 more acquisitions and sold a division to the H2 Equity Partners, a private equity firm.
Today UDG has three divisions: Sharp makes medical packaging, Ashfield Engage does medical sales, and Ashfield Advisory and Ashfield Health do healthcare consulting and communications. 50 per cent of operating profit comes from Ashfield Advisory and Health, 20 per cent from Ashfield Engage and 30 per cent from Sharp, the packaging business.
Though still headquartered in CityWest, the business outgrew Ireland long ago. It employs 9,000 people worldwide, making 69 per cent of its revenue in North America, 16 per cent in the UK, and 15 per cent in the rest of the world.
Motivations and prices
Each of the players in this story — Elliott, CD&R and Allianz — want different things.
Allianz Global Investors is the investing arm of a pension fund. It manages €535 billion of funds. It’s looking for sensible places to park that €535 billion for the long run.
Elliott is in it for a quick buck. It usually gets in and out of its positions quickly. And its reputation is so fearsome that often, all it needs to do is announce that it’s building a stake in a company and the share price will go up, in anticipation that Elliott will do activist investor things and make the share price go up.
CD&R is different again. It’s a private equity firm, so it’ll be targeting an annual internal rate of return (IRR) of 20-25 per cent or so. It will be looking to sell UDG on in three to five years.
Charles Weston at RBC Capital Markets, a brokerage, has run the numbers on CD&R’s likely IRR. The most important point is that CD&R already owns Huntsworth, which a competitor of UDG’s in the healthcare communications space. By combining UDG’s Ashfield business with Huntsworth, it should be able to wring some costs out and do some cross-selling. Weston estimates Ashfield and Huntworth’s combined costs are $1.06 billion. Should CD&R manage to find just $20 million in efficiencies by combining the two, it would boost IRR by three per cent or so.
Then there’s the UDG’s packaging business, Sharp. Sharp is for all intents and purposes a separate business to Ashfield. It doesn’t overlap with it at all. And the market for packaging companies is pretty good – Weston notes that Sharp’s peer, PPI, was sold recently for 18 times Ebitda. By quickly flogging off Sharp, and finding a few synergies with Huntsworth, Weston calculates CD&R could be looking at an IRR of 25 per cent over three years on its investment in UDG.
The prospect of CD&R making juicy returns on UDG is what has annoyed the shareholders, and what has attracted Elliott. They think they can extract a better price from CD&R (Elliott) or convince the other shareholders to forget about the whole idea (Allianz).
For sure, Allianz will be looking at CD&R, and calculating how much it thinks the private equity fund will be willing to pay. But the other thing from Allianz’s point of view is that it believes UDG is undervalued by the market right now. Any funds raised by the sale of UDG to CD&R will have to be redeployed in a historically expensive market. So you can see why it might not be pushed.
Another factor in all this is the role of Liam Fitzgerald. Fitzgerald was CEO of UDG for 16 years, from 2000 to 2016. After UDG he took a job at none other than CD&R, which took him on as an advisor in 2017.
So Fitzgerald knows UDG inside out and knows the board. The board, which stands to make €9 million from a deal, has unanimously backed CD&R’s offer.
As we’ve seen, CD&R could probably push its bid a little higher and still justify this deal. The stock is up about five per cent since then, based on Allianz and Elliott’s push back. So the market is pricing in a better offer.
But there’s reason to think CD&R will stay strong. Weston points out that when it bought Huntsworth, it bid on the low side, and immediately shut down any talk of an improved offer. Last May, it pushed that deal through.
