SHANGHAI – Acting on an offer first announced in April, Shanghai-based Wuxi Pharmatech Inc.'s board has accepted a $3.3 billion privatization bid, effectively taking China's largest CRO off the NYSE.
Company execs reported that the move to go private "will allow us to focus more intently on enhancing platform capabilities and delivering greater solutions to our customers and partners."
A cash deal, New Wuxi Life Science Ltd., led by chairman and CEO Ge Li, will pay $5.75 per ordinary share and $46 per American Depositary Share (ADS) – a premium of 16.5 percent based on the NYSE-listed share price on April 29 – for a total of $3.3 billion.
Jefferies analyst David Windley said in a note, "We do not think the management-led buyer group is the getting the company cheap." Jeffries assessment of the offer values the company at 17 times the 2015 earnings before interest, tax, debt and amortization (EBITDA) vs. average trailing 12 month (TTM) valuations for CRO transactions of greater than 13 times.
The deal is being underwritten by Shanghai Pudong Development Bank Co. Ltd. and Ping An Bank Co. Ltd. for $1.1 billion.
The new owners will cover the remainder of the investment. Investment funds will form a consortium along with a select group of key management, all of whom agreed to roll their shares into the new entity.
Investment in the company is coming from Ally Bridge Group Capital Partners, Boyu Capital, Temasek Life Sciences Private Limited and Ping An Insurance, Hillhouse Fund II LP.
TWO SEGMENTS: MATURE AND GROWTH
As Wuxi pursues its vision to be more than just a CRO – a global open-access services platform – it has emerged into two business segments. One is a core foundation of chemistry and discovery services, which has remained profitable even in the face of tough competition and rising labor costs. The other, a fast-growing new business segment, is best represented by the acquisition last year of Nextcode Genomics and with the entry into areas such as executive health, gene sequencing for rare diseases, a cloud-based genomics data exchange and cancer tumor testing.
Li described this new segment as "challenging" in the latest earnings call, but this could be part of the motive behind the move to go private.
"While those businesses are ramping somewhat slower than hoped," said Jeffries' Windley, "management is pursuing partnerships in even more businesses. That reinforces Wuxi's need to pursue these initiatives, and their attendant volatility, under the watchful eye of a short list of private owners."
Overall, Wuxi is still achieving double-digit growth and, according to Li, in the second quarter earnings call, will book $790 million to $800 million in revenue by year-end.
But if Wuxi should list in China, as one person close to the company predicted would happen, it might have greater financial leverage for its empire building and possibly a way to make its management and investors rich.
The best comparison could be the Shenzhen-listed Hangzhou Tigermed Consulting Co. Ltd., Wuxi's next closest CRO competitor on the mainland. Although smaller, Tigermed has seen its share price go from ¥14.55 on Dec. 9 to ¥41.67 on Aug. 17, for market cap of ¥16.29 billion (US$2.55 billion).
However, the go-private deal comes at an interesting time as China's economy is hit by a number of shocks. Back in April, when news of the potential go-private offer went public, the Chinese stock markets were soaring and the Chinese yuan had not seen a significant change in a decade.
As of last week, the government-controlled yuan was devalued several days in a row on the news that China's exports were contracting and following just weeks after the Chinese stock market's precipitous fall of 20 percent in a few weeks.
Li said in the Q2 earnings call that "because of the uncertainty regarding the currency exchange volatility" and due to several transactions under consideration, the company was withdrawing its EPS financial guidance (net income) for the full year of 2015.
But back in June, in happier times, Reuters reported that Chinese tech firms were dropping their New York listings to head back to China for a piece of the higher valuations the Chinese markets were offering at the time. And a few weeks later, those companies were stuck in limbo, waiting in a queue for the chance to go public in China after the government put a freeze on new listings. Wuxi seems to be following late on the trend.
But it might also be a chance to avoid tougher times ahead. There are concerns that the legal loophole that allowed Chinese companies to have foreign ownership and list overseas – known as the Cayman Island registered variable interest equity (VIE) structure, which was also used by Wuxi – will be removed by the authorities in Beijing.
Time will only tell if Wuxi will be able to ride out the stormy forces buffeting the Chinese economy to stay on top.
The deal is expected to close in the final quarter of the year pending shareholder approval.