Sartorius Polyplus acquisition: An update
A few days ago one of my holdings, Sartorius Stedim Biotech DIM 0.00%↑ announced a large acquisition that left many people scratching their heads. Initially, the company did not provide much information and I wrote an article sharing my confusion with the situation and the seemingly expensive deal on Seeking Alpha. Now the company did hold a press conference going over the deal in more detail and going through a Q&A session.
The call started with something I really don’t like to hear too much (I’ll paraphrase it):
It was owned by private equity, so it was clear that it would come up for sale eventually. It was quite the competitive bidding process.
As value investors, you don’t want to overpay, so buying in a competitive PE sale often leads to that. In my initial article, I mentioned that this deal was much more expensive (25-34 times SALES) than prior bolt-ons (~10 times sales). This can be justified in biotech if there is large enough growth and fitting into the portfolio, enabling cross-selling through the superior distribution capabilities Sartorius has. The company mentioned that the markets Polyplus operates in grow at 20-30%, a significant growth rate and the EBITDA margin is accretive to the Sartorius group (33% margin). This helps to understand the deal better. Sadly, it wasn’t possible to give concrete information, because the deal isn’t through and they are working with private information. Opportunity arises from integrating Polyplus in the upstream applications portfolio, especially with its leading position in viral vectors.
Polyplus has been on top of the target list for Sartorius for a while due to the strategic fit, management said, so it wasn’t an impulse buy or to distract from slowing growth. Another concern that was raised by analysts was if there is cluster risk for Polyplus, which management denied. Lastly financing was also a topic. Sartorius will get a loan and then potentially opportunistically raise capital (if market conditions allow it with a high valuation). Dilution could be anywhere from 0% to lower double digits of the sales price (2.4 billion Euro).
Overall this deal still looks expensive. Below I did a very rough inverse DCF, assuming 20 million in Free cash flow, it would need 27-32% growth over the next decade to make the deal fairly priced. This is somewhat within the expected market growth rate but by no means cheap in my opinion. Time will tell if it was the right move, but for now I’m not looking to increase my position in Sartorius, which is currently the smallest in my portfolio at 1.3%.
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