Australia | May 23 2007
By Chris Shaw
Earlier this month Symbion Health (SYB) received a proposal from a consortium including Healthscope (HSP) and private equity players Archer Capital and Ironbridge Capital valuing the company at $4.30 per share, a level Macquarie suggested was not enough to acquire the company given the potential for rival bids to emerge.
Morgan Stanley agrees with this assessment, rating the stock as Overweight given the opportunity it offers as a break-up play in particular for those already in the industry. The broker has placed a price target of $4.83 on the stock, singling out a Sigma Pharmaceuticals (SIP) led consortium as a likely rival bidder.
It appears to have been a good hunch, as Sigma management today indicated the company has approached a consortium of banks with respect to potentially making a takeover offer for Symbion. While there has been no indication with respect to price, it is believed the group will only proceed if it was to obtain ACCC approval.
Morgan Stanley suggests Sigma would be most interested in the company’s Consumer operations, as these would offer it some synergies and complete its in-house pharmacy supply model. In contrast it sees regulatory issues as a hindrance to retaining the Pharmacy Services division, as it would then have more than 90% market share in Western Australia and all of the Tasmanian market.
As the Pathology and Diagnostic Imaging operations would provide no synergies for the company the broker can see a situation where a partner such as Ramsay Healthcare (RHC) joins the bid, as it could then take the divisions Sigma didn’t want. Credit Suisse also recently explored such a scenario but took the view it would be Primary Healthcare (PRY) that would be most likely to join Sigma in a bid.
It was enough for the broker to lift its rating on Symbion to Neutral from Underperform, while the FNArena database shows a total of five Hold ratings, one Buy, and two Reduce/Sell recommendation with an average price target of $4.08.
While Symbion is an obvious target as the company has already been approached, Citi sees a case where any move by Sigma could help it avoid becoming a target itself given the stock is at a discount to recent multiples paid in global deals in the generic drug sector.
The broker points to three recent deals and estimates the average multiple paid was 15.8x earnings, which it suggests implies a share price for Sigma of $3.22, well above today’s price of around $2.40.
Earnings for the company provide some support for higher prices, as shareholders at today’s annual general meeting were told to expect 15% profit growth in the coming year. Currently the FNArena database shows Sigma as rated Buy five times, compared to one Accumulate and four Hold recommendations. The average share price target according to the database is $2.86, so there appears some upside from current levels.
Shares in Symbion are slightly stronger today and at 2.05pm the stock was up 2c at $4.33, while Sigma shares were down 1c at $2.41.