Aspen prescribes bolt-on acquisitions

• Global, South Africa
• Aspen, Bolt-on acquisition, Pharmaceutical, Transformative acquisition
• September 10, 2020

Aspen Pharmacare is a R60bn pharmaceuticals giant that used to be a lot bigger. The share price is down over 57% in 5 years, reflecting an unsuccessful strategy to push into developed as well as emerging markets, all while steadily building up a debt pile.

It’s a story that seems to play out over and over again: South African corporates going offshore and hurting shareholders in the process.

Offshore: it’s no holiday

It’s not easy going offshore. Many South African management teams have learned this the hard way. For the best South African companies, there’s a point at which they simply run out of growth opportunities here at home.

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In these situations, companies often use debt to make risky acquisitions offshore. Sometimes it goes well, but it usually goes badly. Only the investment banks have consistently done well off the South African corporate offshore expansion strategies, earning delicious advisory fees along the way.

“Of course you should invest offshore – and we can arrange the debt to help you do it!”

Some companies survive their strategic missteps, learning from the experience and adjusting accordingly. Others make such risky acquisitions that there is no room to recover or pivot if things go wrong, like Woolworths’ disastrous efforts in Australia. The share price has gone Down Under as a result.

Going offshore is no holiday, that’s for sure. Too many companies end up flying on Impairment Airlines and taking shareholders along for a painful ride.

Aspen is focusing on emerging markets

Aspen has realised the error of its ways and has sold down its developed market exposure.

It just sold its European thrombosis business for around €640m, assisting greatly in reducing Aspen’s debt levels. This is a strong follow-on from 2019 when Aspen sold several businesses, including an infant nutrition business in France and an exit from Japan.

Aspen has managed to pay down around R18bn in debt over the past 18 months, with a strong share price performance since Aspen bottomed out in August 2019.

As ever, the real question is what the future holds.

Aspen CEO Stephen Saad has made it clear that Aspen will now focus on “bolt-on acquisitions” in emerging markets.

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What is a “bolt-on” acquisition?

This is a commonly used term in corporate finance and private equity discussions. Essentially, a bolt-on acquisition is a strategy to buy companies that are a natural and easy fit with what you are already doing.

For example, if you are a company that sells fruit and nuts and already has warehouses and supply chain in place, buying a chain of biltong shops would be considered a bolt-on acquisition. It’s not precisely what you are currently doing, but it’s close enough that there are significant potential synergies. It’s still a specialist food business with small retail stores.

Buying a group of restaurants, for example, would not be a bolt-on acquisition. It would be a “new vertical” i.e. a different business line focusing on serving sit-down meals rather than packaged food. It’s a vastly different business operationally and synergies will be close to zero.

The opposite of a bolt-on acquisition would be a “transformative acquisition” or something that “moves the dial” – also known as a recipe for shareholder disaster.

Is this the right medicine for Aspen?

Aspen’s depressed valuation is a hangover from a time when it nearly breached debt covenants and scared the living daylights out of shareholders. Things have certainly moved on from there and shareholders that took a punt in August 2019 have been richly rewarded.

Having survived the debt pressure and refocused the business, the focus will now be on making intelligent, low-risk acquisitions in countries where Aspen has a competitive advantage. Expanding offshore is great for shareholders when management does it in a measured fashion with a clear strategy,

Trading on a P/E of around 10x is hardly a demanding valuation, yet the share price was down 5.7% today after the company released results that confirmed a 9% increase in headline earnings and no dividend to shareholders.

Aspen won’t be a cash cow going forward, so buying shares means you are backing management to get it right this time and learn from their prior mistakes. At least “bolt-on” is a better word than “transformative”.

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