{"id":4268,"date":"2021-03-14T09:44:24","date_gmt":"2021-03-14T09:44:24","guid":{"rendered":"https:\/\/thefinanceghost.com\/?p=4266"},"modified":"2021-03-14T09:44:24","modified_gmt":"2021-03-14T09:44:24","slug":"rolling-the-dice-on-descendis-health-3","status":"publish","type":"post","link":"https:\/\/thefinanceghost.com\/index.php\/2021\/03\/14\/rolling-the-dice-on-descendis-health-3\/","title":{"rendered":"Rolling the dice on Descendis Health"},"content":{"rendered":"

T<\/span>he company is actually called Ascendis Health, but one look at a share price chart and you\u2019ll understand why I laughed when an ex-banking colleague called it Descendis Health in a chat we had a few weeks ago.\u00a0 With a nod to his genius, I\u2019ve borrowed the name.<\/p>\n

If there was ever a poster child for a high-risk acquisitive strategy gone wrong, pushed by private equity shareholders, Ascendis Health is it.<\/p>\n

The private equity house in question was Coast2Coast. They had the most over-sized team of professionals I\u2019ve seen in my life, focusing on finding deals for their two horses in the race: Ascendis Health and Bounty Brands.<\/p>\n

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I simply couldn\u2019t understand how so many expensive people could work in one place, paid for by companies that were sucking cash flow themselves to pay for acquisitions. Where was all the money coming from?<\/p>\n

Turns out my gut feel was right. Google Coast2Coast Capital and you won\u2019t even find a website. As I often say on The Finance Ghost, investing is about common sense above all else.<\/p>\n

Platforms \u2013 banker style<\/h4>\n

Corporate financiers ran around the South African market for years talking about \u201coperating pillars\u201d and \u201cplatforms\u201d with \u201cthe right jockeys\u201d \u2013 if investment banking became a game of drinking bingo, everyone would be in hospital on an IV drip after the first day. It\u2019s the same terminology over and over again.<\/p>\n

To be clear, these aren\u2019t platforms in the context of tech companies. Tech platforms are businesses like Facebook and Twitter that enjoy network effects and become exponentially more valuable as more people use the service.<\/p>\n

No, when bankers used the word platform, they were talking about a colourful block on a PowerPoint slide that said \u201chealthcare\u201d or \u201cconsumer\u201d \u2013 think of it more as a corporate filing system than a specific revenue strategy. Each block had a specialised management team that focuses on finding assets to buy in that industry.<\/p>\n

Buy for 5x. Trade at 10x.<\/h4>\n

There was an entire school of thought in the South African market that if you mopped up a bunch of companies and paid a multiple of 5x earnings, the combined listed company would miraculously be worth 10x those same earnings. \u201cMultiple arbitrage!\u201d the dealmakers cried, before asking the bank for money to finance the acquisitions.<\/p>\n

After all, the best kind of multiple arbitrage is the one you can achieve with the bank\u2019s money. It\u2019s a case of get rich or die tryin\u2019, to borrow the term from rapper 50 Cent (which is approximately the current share price of Ascendis).<\/p>\n

To give an idea of the value destruction, in September 2016 Ascendis was trading at over R28 per share. It\u2019s lost over 98% of its value. The Descendis joke should make sense to you now.<\/p>\n

Multiple arbitrage is a nonsense strategy. It turns out that a basket of things bought for 5x is likely worth 5x. When the economy turns sour, those companies cannot service the debt used in the acquisitions.<\/p>\n

The only time that an industry aggregator strategy works is when there are clear scale benefits or the companies can work together and\u2026 wait for it\u2026 \u201dunlock synergies\u201d (have another drink). The best example I can think of is Bidvest.<\/p>\n

There is still meat on Ascendis\u2019 bones<\/h4>\n

For all the shareholder value destruction we have witnessed at Ascendis, there are businesses in the group that are worth owning.<\/p>\n

The largest is Remedica, a pharmaceutical company in Cyprus (no, really) which develops, manufactures and markets generic medicines with a focus on antiretroviral and oncology treatments.<\/p>\n

It\u2019s a solid operation that saw revenue increase around 20% in the six months to December 2020 and normalised EBITDA expected to show a 20% to 40% increase to over \u20ac20 million. Remember, EBITDA a measure of earnings before <\/em>interest payments, so it reflects the true company performance ignoring the unsustainable debt.<\/p>\n

Including the other European businesses, Ascendis\u2019 international portfolio generated interim normalised EBITDA of somewhere between \u20ac30 million and \u20ac35 million. The South African portfolio of businesses generated normalised EBITDA of between R323 million and R372 million. These are interim numbers i.e. for six months.<\/p>\n

In round numbers and with a reasonable assumption of growth over the next six months, but without being too aggressive, Ascendis should generate around R1.5bn in normalised annual EBITDA. With over R7bn in debt (admittedly an outdated number last reported at June 2020) and a market capitalisation of around R250m, the market is valuing Ascendis\u2019 assets at 5x EBITDA in round numbers.<\/p>\n

Remember, the formula for the market capitalisation (or equity value) is EBITDA * EBITDA multiple, less net debt.<\/p>\n

It\u2019s worth touching on big pharma EBITDA multiples: Pfizer (15x), Johnson & Johnson (15.8x) and Merck & Co (11.2x). These are massive companies but it\u2019s not unreasonable to think that Ascendis\u2019 European assets could fetch 7x \u2013 8x EBITDA in a properly run asset sale process.<\/p>\n

In my opinion, a case could be made that Ascendis should be trading at more like 6.5x forward EBITDA which would imply strong upside in the share price for those willing to take a big risk here.<\/p>\n

So, let\u2019s talk about those risks.<\/p>\n

Vultures are circling the carcass<\/h4>\n

At the helm of this business is Mark Sardi, a highly respected ex-investment banker who previously served as CFO of Truworths and CEO of Cipla South Africa. After a stint at House of Busby, he clearly felt like a challenge and took the top job at Ascendis in October 2019.<\/p>\n

The shareholders need someone like Sardi in charge because there are corporate raiders at the gate.<\/p>\n

Ascendis has a >R7bn debt problem. Combined with the strong results in the underlying businesses, it makes the company a sitting duck for opportunistic operators who make a living from plucking quality assets out of broken balance sheets.<\/p>\n

There\u2019s nothing wrong with this of course. There need to be checks and balances in the system for companies like Ascendis that played fast and loose for years. If you want to operate with a ridiculous balance sheet then you need to be prepared to lose everything.<\/p>\n

Blantyre Capital has a one-page website. It simply says that the company is focused on \u201cpartnering with European companies in relaunching good businesses with temporary financial challenges\u201d.<\/p>\n

The other party you need to know about is L1 Health, a company that \u201cpartners with entrepreneurs and industry executives to invest in long-term, global trends that transform healthcare.\u201d<\/p>\n

In other words, Blantyre is the pit bull and L1 Health is the perfectly groomed poodle that arrives once the dirty work is done and the assets have been taken.<\/p>\n

In the space of just a few weeks, Blantyre and L1 managed to increase their exposure as a \u201cConsortium Lender\u201d from one third \u00a0to over 75%. In other words, they bought the Ascendis debt from other lenders. This gives these raiders the power to provide or withhold all important waivers, deferrals and consents that require approval by the majority of lenders.<\/p>\n

They now hold all the power over the group\u2019s restructure.<\/p>\n

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The best interests of the company<\/h4>\n

Sardi has a fiduciary duty towards the company, not the shareholders. In company law, the company itself is sacrosanct. His primary goal must be to preserve the company, not to protect the current shareholders. If the shareholders win as a by-product of that fiduciary duty, it is through luck rather than by design.<\/p>\n

There are numerous laws in South Africa as well as JSE regulations that try to protect minority shareholders. This gives some comfort that a proper process will be followed.<\/p>\n

In a February announcement, Ascendis noted that the lenders do not want to break up the company but would rather seek alternative ways to restructure it. In an update on 9th<\/sup> March, further details were given of a recapitalisation and restructure which sounded a lot like breaking up the company.<\/p>\n

If we look through all the noise, the position is fairly simple:<\/p>\n