The shortlisted bidders for Polfa Warszawa, one of the last of the Polish state pharmaceutical companies to be privatised, are an eclectic bunch and illustrate clearly the extent to which many of the firms that used to be aggressive acquirers of assets have stepped to the sidelines, while new players have come in to take their place.
The least surprising names on the list are Polpharma and Adamed, both of which bid for Polfa Warszawa the last time that the government attempted to sell it, in mid-2010. On that occasion, the auction was cancelled after the final bids were in, apparently due to the prices offered being inadequate. This time round, the locals are joined by Actavis, Arterium (one of the larger pharma companies in Ukraine) and Harbin Gloria (China). Actavis used to be present in almost every sale process, of course, but has been absent from the scene since it was taken private in mid-2007 and subsequently found itself massively leveraged. A debt restructuring in 2010 appears to have improved the situation and we suspect that Actavis stands the best chance of emerging the owner of Polfa Warszawa, since most of its rivals are likely to have far more difficulty in funding the deal than it is.
Warszawa has sales of more than €75m, implying a valuation in the €150-200m range, which is a substantial sum, particularly as there will also be a lot of restructuring to be done. Adamed has only just spent €77m buying Polfa Pabianice, Polpharma is likely to value Warszawa pretty lowly and would have to rely on bank debt (although it could raise it fairly easily) and Arterium – which, as far as we know, has never previously attempted to buy assets outside the CIS – is no bigger than Polfa Warszawa and would thus need a partner as well as debt. Harbin Gloria is more of a wild card. It is quoted and hence could raise fresh capital if needed, but it is entirely mysterious why a company whose activities – as far as we know – are confined to China should suddenly want to acquire an asset in Poland. The most logical reason would be to give it a bridgehead in the EU, that it could use to launch its products in Europe, but Warszawa has no experience outside eastern Europe and the non-regulated emerging markets and so would only be of limited help in this regard. Harbin would also surely find it hard to cope with cutting Polfa Warszawa’s workforce of 1,350 to a manageable level, something that is going to be a challenge for all the bidders.
The companies that are not bidding are in some ways even more illuminating than those that are. No big pharma for instance, which confirms that their interest in the emerging markets is very much confined to larger countries such as India, China, Russia and Brazil and does not extend to much smaller markets that are showing only slow growth. But also no Stada, no Mylan, no Watson – all companies that are present in Europe but lack significant assets on the ground in Poland. In the case of Stada, a lack of cash and an unwillingness to undertake major restructuring are probably the main reasons, while Watson would presumably prefer to buy something more significant and Mylan – which is also cash-constrained – seems happy to build up organically in CEE for now.
It is still too early to tell what sort of valuation will actually be achieved for Polfa Warszawa, but in our view, we are already seeing a clear distinction between those transactions that have big pharma interest and those that don’t. In the former, multiples can be expected to reach levels that recall the happy days of cheap credit, while in the latter, EV/EBITDA values will be in single digits. Unfortunately, vendors often don’t appreciate the difference, so we are likely to see more deals being pulled in future, with Polfa Warszawa being one of them if the government still isn’t ready to face reality.
Posted on 28th December 2010