(Reuters) – Swiss drugs industry supplier Lonza (LONN.VX) has outbid U.S. private equity group JLL for Canadian drugmaker Patheon (PTI.TO) in a deal worth $460 million, seeking to boost its manufacturing capacity.
Lonza’s bid of $3.55 per share for Patheon offers a potential windfall to majority shareholder JLL Partners, which launched an offer at $2 a share last December and has been building its stake since.
The non-binding offer, priced at a premium of 50 percent to Patheon’s Thursday’s close of C$2.58 ($2.35), gives the Canadian group an enterprise value of $700 million. Patheon shares jumped 35.7 percent to C$3.50 on the Toronto Stock Exchange on Friday.
Analysts said the deal made strategic sense for Lonza, as it would allow it to offer drugmakers a wider range of services, but they expressed some concerns about Patheon’s profitability and a possible bidding war.
“From a strategic standpoint this acquisition makes sense. However, from a financial standpoint the deal will be dilutive in the beginning and can only become accretive if Lonza can achieve an operational turnaround,” said Vontobel analyst Carla Baenziger.
Lonza, which has warned that its operating profit will not rise this year, said the deal would add to earnings per share from the second year and would improve its return on assets.
“We think this is a fair value for the company based on our current assumptions. We now have to conclude the due diligence. The entire business is appealing to us because it’s the area of business we want to move in,” a Lonza spokesman said.
“We are not willing to enter into a bidding war,” he added.
Lonza, which had net cash of 231 million francs ($217 million) at the end of June, said it planned to finance the deal from existing cash resources and bond instruments. The group has said it could spend 1 billion francs on acquisitions.
Lonza shares fell 3.5 percent to 105.90 Swiss francs.
Douglas Loe, an analyst at Versant Partners in Toronto, sees the stakes pushing higher before the saga reaches a conclusion, and he has a one-year target on Patheon stock of C$4.50.
“I think it’s entirely possible that both JLL and Lonza will agree with us that there is still value in Patheon’s growth prospects at or near our one-year target, and we think that either of those players or others could agree,” he told Reuters.
“There is potential for a new bid to materialize.”
Patheon was in the top three of the global commercial manufacturing market and in the top five of the worldwide pharmaceutical development services market, Lonza said.
Lonza said Patheon’s special committee of independent directors supports the Lonza bid. It was not immediately clear what proportion of Lonza shares the committee, which rejected JLL’s bid in April, represents.
Private equity firm JLL holds 57 percent of Patheon, a Lonza spokesman said. Lonza said its purchase was dependent on it gaining more than 67 percent of the group and it was not interested in a minority stake.
JLL was not available for comment.
Basel-based Lonza has moved away from specialty chemicals to focus on higher-margin pharmaceutical ingredients, helping shield it from problems such as low-cost competition from Asia, which has affected Swiss peers such as Clariant (CLN.VX).
It is now looking to move into the production of end products and was also in negotiations with another two or three companies, said Stefan Borgas, Lonza’s chief executive.
“The next step on the manufacturing side would be to expand our capabilities towards finished-dosage development and production capabilities. Patheon is one great way for us to get into this field,” Borgas said on the conference call.
Patheon, which has more than 4,000 employees and sales of $717 million, provides contract development and manufacturing services to the pharmaceutical industry. Its services a range from preclinical development to commercial manufacturing.
“It is a very positive development. It does show value well above the JLL offer and obviously well above where the stock has been trading. It is a proposal that needs to be explored further,” Patheon Chief Executive Paul Currie told Reuters.
“The strategic fit and the logic behind it are very, very compelling.”
By Katie Reid and Martin de Sa’Pinto
(Additional reporting by Scott Anderson in Toronto; Editing by Will Waterman and Rob Wilson) ($1=$1.08 Canadian) ($1=1.065 Swiss franc)