M a analysis_roche_genentech
2 likes4,260 views
This document analyzes Roche's potential acquisition of Genentech. It discusses Roche's choices to either concede but negotiate a higher price, make a tender offer directly to shareholders, or wait in hopes that a new cancer drug fails which would lower Genentech's value. It then provides valuations of Genentech from $78-115 per share and compares to other company multiples. Finally, it describes how the acquisition progressed from hostile to friendly after Roche raised its offer price.
M a analysis_roche_genentech
- 1. ROCHE + GENENTECH M&A Analysis Dutta-Roy & Team
- 2. 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.
- 3. 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
- 4. HIGH LEVEL GENENTECH VALUATION Genentech Cashflow + 7B Free Cash + % License Revenue + X-Factor for return on cash or debt savings
- 5. 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)
- 6. A-TEAM‟S DCF VALUATION ANALYSIS
- 7. MARKET MULTIPLES 2008 4.8 12 19.7 1.2 7 16.5 26.1 1.4 6.7 16.7 24.1 1.2 0 5 10 15 20 25 30 35 xRevenue 2008 xEBITDA 2008 xPrice/Earnings 2008 xPEG 2008 Market Multiples vs Genentech LRP Offer (2008)Median Genentech Mean 4.3 11.3 16.5 0.9 6.5 15.5 23.1 1.2 5.6 14 18.8 1 0 5 10 15 20 25 30 xRevenue 2009 xEBITDA 2009 xPrice/Earnings 2009 xPEG 2009 Market Multiples vs Genentech LRP Offer (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
- 8. 90 78.62 73.94 112 98 84.08 81.54 115 70 80 90 100 110 120 130 Our Valuation (DCF) Average Multiples LRP (DCF) NFM (DCF) Price of Share (Min) Price of Share (Max) FINAL COMPARISON
- 9. CHOICES, CHOICES, CHOICES Option 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
- 10. 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.
- 11. AFTERMATH – HOSTILE TO FRIENDLY January •1/29/09 – Roche tenders at $86.50 •1/30/09 – Special Committee recommends no action and reiterates its 8/13/08 rejection of $89 February •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 April Avastin fails clinical trials. Analysts suggest this would have driven Genentech‟s pre-deal value down to $70 per share.
Editor's Notes
- #8: - MarketComparables: Firms in Exhibit 13 – Amgen, Gilead Sciences, Celgene, Genzyme, Biogen Idec, Cephalon are all biotech firmsHowever Only Amgen and Gilead have half of the enterprise value as that of GenentechThere is a much higher probability that the smaller firms maybe less liquid and carry higher risks.Beta of .494 (Amgen) and .894 (Gilead)