M&A Analysis Roche Genentech
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Transcript of M&A Analysis Roche Genentech
ROCHE + GENENTECHM&A Analysis
Dutta-Roy & Team
HUMER’S CHOICES
1. Concede but negotiate – Raise the offer price
2. Tender Offer – Go after Genentech’s shareholders directly.
3. Wait – If breakthrough cancer drug, Avastin, is unsuccessful Genentech’s performance will waver. The price will be driven down. Or, if successful, the acquisition will be more expensive.
TWO VALUATIONS
Greenhill & Co. – LRP Goldman Sachs - NFM
• DCF-WACC
• 9% WACC
• 2% Long-term Growth Rate (post 2018)
• 7.1% Market Risk Premium
• Deduct debt, add cash and marketable securities
• Does not include a control premium
• EBITDA and Earnings multiples confirm a similar value
• Higher Revenue - $14.118B vs. $13.535B
• Extended Forecast – 2018 vs. 2024
• 6.9% Cumulative Average Growth Rate
• Similar Costs/Revenue ratios
• Lower taxes, depreciation, working capital, and capital expenditures
• $11.4B deduction for equity-based compensation
• $8.2B addition for ‘opt-in’ rights 2015 expiration
HIGH LEVEL GENENTECH VALUATION
Genentech Cashflow
+ 7B Free Cash
+ % License Revenue
+ X-Factor for return on
cash or debt savings
A-TEAM’S DCF VALUATION ANALYSIS• Starting Revenue $14
billion
• 10 years of 7% high growth
• 35% tax rate
• Add portion of cash ($7B)
• Equity Compensation (1.3% of Annual Revenue)
A-TEAM’S DCF VALUATION ANALYSIS
MARKET MULTIPLES 2008
xRevenue 2008 xEBITDA 2008 xPrice/Earnings 2008 xPEG 20080
5
10
15
20
25
30
4.8
12
19.7
1.2
7
16.5
26.1
1.4
6.7
16.7
24.1
1.2
Market Multiples vs Genentech LRP Offer (2008) Median
Genentech
Mean
xRevenue 2009 xEBITDA 2009 xPrice/Earnings 2009
xPEG 20090
5
10
15
20
25
4.3
11.3
16.5
0.9
6.5
15.5
23.1
1.2
5.6
14
18.8
1
Market Multiples vs Genentech LRP Of-fer (2009)
Median
Genentech
Mean
Equity Value
Enterprise Value
Debt
Amgen $57,222 $59,752 $11,177 Gilead
Sciences $48,988 $48,194 $1,300
Celgene $33,163 $31,137 $223 Genezyme $21,570 $21,416 $810
Biogen Idec $18,942 $19,169 $1,563 Cephalon $6,831 $5,982 $1,241
Genentech $87,833 $84,570 $3,001
Our Valuation (DCF) Average Multiples LRP (DCF) NFM (DCF)70
75
80
85
90
95
100
105
110
115
120
90.00
78.62
73.94
112.00
98
84.0881.54
115Price of Share (Min)Price of Share (Max)
FINAL COMPARISON
CHOICES, CHOICES, CHOICESOption 2: Tender
• Uncertain whether Roche can amicably continue to make tender offers.
• Requires a two-step “squeeze out”
• Roche maintains a minority on the board, and needs 50.1% of the 44% remaining share to close. If it raises the cash, but doesn’t close, Roche will be stuck with interest payments.
Option 3: Wait
• Depends on the success of a new cancer drug, Avastin.
• Genentech’s value may continue to fluctuate
• The acquisition may be more costly if the drug is successful
THE FINANCIAL CRISIS AND THE AVAILABILITY OF DEBT
“Roche did not have firm commitments for funds to finance the acquisition, and in January 2009, global markets were still extremely fragile.”
Roche will ensure financing with the help of the newly acquired “right to spend” Genentech’s $7B in cash. Roche can pay down new debt quickly, if needed.
AFTERMATH – HOSTILE TO FRIENDLYJanuary•1/29/09 – Roche tenders at $86.50•1/30/09 – Special Committee recommends no action and reiterates its 8/13/08 rejection of $89February•2/23/09 – Special Committee recommends rejection of $86.50 tender offer•2/25/09 – 3/4/09 - Roche raises $16.5B cash from bond sales; raises an additional €11.5B and £1.25B totaling $32B cash
March•3/6/09 – Roche raises existing tender to $93, extends expiration by 10 days•3/6/09 – Special Committee recommends no action on $93 offer•3/12/09 – Roche raises to $95, Special Committee endorses•3/26/09 – Deal closes
AprilAvastin fails clinical trials. Analysts suggest this would have driven Genentech’s pre-deal value down to $70 per share.