The International Market - Assignment Example

Corporate Finance: M&A Report

Executive summary

In 2015, BC Partners acquired Pharmathen S.A in an M&A deal agreed upon the two companies. In the deal, BC Partners acquired an eighty percent stake in Pharmathen S.A. However, the deal accounted for the retention of Pharmathen’s founders and the management team. The deal made between the two companies aims at advancing investment in the development and manufacture of new pharmaceutical products, expanding internationally among others. The M&A deal will potentially face stiff competition in the pharmaceutical industry in the country. In 2014, over 110 pharmaceutical companies were competing in the country. The company can sell its products to both the local and international market. The key buyers in the local markets are mainly hospitals and pharmacies. In the international market, Greece has a well-established export route in Europe. The international market is ideal for the BC Partners and Pharmathen S.A M&A deal since prices there are higher as compared to the local market.

Introduction

BC Partners acquired Pharmathen S.A, a pharmaceutical company based in Athens in an M&A deal made 2015. This is the first deal that BC Partners has made in about ten years. Additionally, the deal was a private equity buyout; something that the country has not experienced in a period of two years (Macfarlane, 2015, p.1).However, according to the deal, the founders of Pharmathen S.A will still be a part of shareholders of BC Partners. Pharmathen S.A was established in 1969 and has since then developed, manufactured, and out-licensed pharmaceutical products. The company has garnered many customers all over the globe and has many employees that work in the company’s research laboratories and manufacturing units. Other than developing new drugs, the company has also distributed its products to more than eighty countries all over the world. The partnership made by BC Partners and the founders of Pharmathen S.A focuses on enhancing the strong performance that Pharmathen S.A has exhibited. Additionally, the deal focuses on fostering investment in the development of new products, expanding internationally, and taking advantage of the generic pharmaceutical sector, which is growing (Bcpartners, 2015, p.1). This paper is a detailed and analytical analysis of the M&A deal between Pharmathen S.A and BC Partners.

1. Strategy/Deal Rationale/Industry context

The strategy applied in the deal between BC Partners, and Pharmathen S.A is merger and acquisition. This refers to the agreement in which a company decides to purchase and/or join with another company or companies (Freitag, 2014, p.1). BC Partners and Pharmathen S.A, therefore, join forces and becoming a new business. The M&A deal between the two companies is such that BC Partners acquires eighty percent stake in the Pharmathen S.A (Pwc, 2016, p.28). However, according to the deal, the Katsos family, which comprises of the founders of the Pharmathen S.A, and the management team, will be retained in the new partnership. The purpose of retaining the Katsos family and the management team is for them to provide strategic advice with regard to their vast knowledge and experience in the development and manufacture of pharmaceutical products (Pharmathen, 2015, p.1).

The deal rationale encompasses several factors. First, according to Vassilios Katsos, Pharmathen S.A’s president, the deal serves the purpose of safeguarding and significantly reinforcing the strong foundation that Pharmathen S.A has laid. Secondly, the deal is made to further the development of the business in consistency with the company’s strategy, that is, the creation of a global pharmaceutical group based in Greece. Thirdly, according to Nikos Stathopoulos, part of the BC Partners’ management team, the deal is made to ensure that the company's growth exhibits an increasing trend. This is achievable through the development of new products and diversification of international markets (Pharmathen, 2015, p.1).

According to Vassilios, the pharmaceutical industry is growing. Pharmathen S.A is one of the leading companies in the European pharmaceutical industry (Pharmathen, 2015, p.1). There is a high competition within the pharmaceutical industry due to the high number of pharmaceutical companies. In Greece alone, there were one hundred and twelve pharmaceutical companies in 2014 (Yannacopoulos, 2014, p.1). Deductively, this means that the pharmaceutical company established under the M&A deal between BC Partners and Pharmathen S.A will face competition from more than a hundred companies in the industry. In 2015, the drug manufacturers and the entire pharmaceutical industry in Greece, in a letter directed to the European Commission, regarded the pharmaceuticals market in Greece to have certain shortcomings. Additionally, the pharmaceutical industry of Greece is likely to suffer from a shortage of the pharmaceutical products if the country decides to leave the European Union (Ward, 2015, p.1).

2. Situation (Buyers wheel /target in play)

The objective of every company is to be successful both locally and internationally. The M&A deal between BC Partners and Pharmathen S.A is likely to have a poor market locally because of the inefficiency that characterizes Greece pharmaceutical markets (Vandoros and Stargardt, 2012). Some of the key local buyers of the pharmaceutical products are hospitals and pharmacies. In 2013, for example, the expectation was that, pharmacies would spend about €10,038 million whereas hospitals would spend €4,515 million on pharmaceutical products (StartupGreece, 2011, p.4). Thus, hospitals and pharmacies should be the target buyers of the products produced by the BC Partners and Pharmathen S.A M&A based on their deal. The expenditure on the pharmaceutical products of these two key local buyers exhibits an increasing trend. The graph below provides a visual representation of the same.

Graph Showing Greece’s pharmaceutical expenditure (in € millions) from 2000 to 2013

(StartupGreece, 2011, p.4)

The state contributes to the Greece’s pharmaceutical expenditure because of its funding for social security. A positive correlation exists between the social security funding and the pharmaceutical spending in the country, both of which exhibit an increasing trend. Thee graphs below illustrate the same.

(StartupGreece, 2011, p.8)

(StartupGreece, 2011, p.8)

The target market for the pharmaceutical products is mainly the aged and the females. As people age, their consumption of pharmaceutical products also increases (StartupGreece, 2011, p.11). Additionally, in the international market, the BC Partners and Pharmathen S.A deal depicts the potential of having a good market. Greece’s export route into the European Union is well established. Germany is the best market for pharmaceutical products from Greece accounting to about 37.9% of all the exports. Other key export destinations for the Greece’s pharmaceutical products include the UK, Netherlands, Cyprus, and Denmark among others.

(StartupGreece, 2011, p.6).

(StartupGreece, 2011, p.6)

Thus for the success of the BC Partners and Pharmathen S.A M&A deal, focus entities in the local market should be hospitals, pharmacies, and aged females. They should focus on promoting social security funding; this will increase the expenditure on pharmaceutical products in the country. In the international market, they should focus mainly on the European Union, which has viable trading routes.

3. Valuation (/Pricing/Financing)

Valuation

By the time the deal between BC Partners and Pharmathen S.A was enacted, BC Partners was valued at €95 billion. Since the company’s inception, it has invested in eighty-seven companies. By using the company’s sale to estimate its value, Pharmathen S.A is valued at €180 million as of 2014. Additionally, the company has 1,000 employees (Bcpartners, 2011, p.1). It also has three research laboratories as well as two manufacturing units (Pharmathen, 2015, p.1). The size of the deal in which BC Partners acquired eighty percent stake in the Pharmathen S.A was € 470 million (Pwc, 2016, p.28).

Pricing/Financing

The BC Partners and Pharmathen S.A M&A deal is likely to be affected by poor pricing in the local market. Comparatively, the prices of pharmaceutical products in the country are low. Consequently, the supply of pharmaceutical products to the country is low since most of the pharmaceutical companies prefer to sell their products in other European countries where prices are relatively high. Companies regard Greece as being unprofitable. It is most probable that traders will export products to other countries where prices are higher causing a shortage of the pharmaceutical products in the local market (Sukkar and Smith, 2013). Therefore, to achieve success, the BC Partners and Pharmathen S.A should focus on exporting their products to countries where prices are high and selling little of their products at the local market where prices are low. The low prices of pharmaceutical products in Greece are attributable to the amendment of the pricing and reimbursement regulation of 2014. According to the amendment, a price ceiling of fifty percent was set for medicines. Additionally, the price ceiling was set as the average of the lowest prices of drugs in the other three countries of the EU (Taylor, 2013, p.1).

4. Considerations regarding Post-Transaction success or failure

The signing of the deal between BC Partners and Pharmathen S.A is not a guarantee of success. There have been cases where failure has been evident after the enactment of an M&A deal between companies. One of the considerations that were necessary after the implementation of the deal was to retain the founders and the management team working for Pharmathen. The adoption of this strategy aims at facilitating success since this team is significantly conversant with the production of pharmaceutical products. Retaining the founders and the management team would also help in reducing the probability of failure. However, when the after the enactment of the deal terms were not agreed on what would happen in case the M&A deal led to success or failure. To achieve success and avoid failure, the partnership aimed at making the business international. Additionally, the development of new products will prevail.

Conclusion

In conclusion, in spite of the BC Partners and Pharmathen S.A M&A deal being the first that BC Partners has made in ten years, it denotes significant potential for success. This is due to the vast experience that Pharmathen S.A has in the development and manufacture of pharmaceutical products. Additionally, the retention of the founders and management team of Pharmathen increases the probability of success for the M&A deal. However, it will be would be more lucrative to invest internationally than locally; this is because the local market is inefficient and is characterized by low price in comparison to other European countries. In the local market, the target buyers should be hospitals and pharmacies.