EQT's pet-drug foray could yield tame returns
14/04/2023 15:32
(The author is a Reuters Breakingviews columnist. The opinions
expressed are their own.)
LONDON, April 14 (Reuters Breakingviews) - EQT
EQTAB.ST is turning to furry friends to defy the buyout
market’s record slowdown. The $24.5 billion European private
equity firm has approached Dechra Pharmaceuticals DPH.L with a
4,070 pence a share all-cash offer which values the UK-listed
veterinary group at 4.6 billion pounds. For EQT boss Christian
Sinding there’s a fine line between a deal as cute as a kitten,
and one that’s a bit of a dog.
There’s a lot to like. Dechra, which develops drugs that
treat conditions like animal obesity, has already welcomed the
51% premium the Stockholm-listed buyout fund is offering. The
animal drugs market, which Global Market Insights valued at $35
billion in 2022, is expected to expand at a compound annual
growth rate of 5.4% between 2023 and 2032. EQT has already
secured the Abu Dhabi Investment Authority as a co-investor, and
knows the sector well: its portfolio companies already include
IVC Evidensia, Europe's biggest vets group, German online pet
supplies retailer Zooplus ZO1G.H and UK pet insurer ManyPets.
Still, it looks a stretch to secure the sort of 20% returns
buyout shops usually seek. EQT’s offer values Dechra at 27 times
its EBITDA for the last 12 months. Bullishly assume the group
can grow revenue at 10% annually, improve the current 28% EBITDA
margin to 30%, and sell after five years at a superior 28 times
EBITDA multiple. Even financing a quarter of the deal with debt
at 6 times EBITDA, the deal’s internal rate of return would only
amount to 17%. If Dechra grows at the market’s 5.4% growth rate,
the IRR would fall below 12%. EQT investors should hope its pet
experience counts for something. (By Pamela Barbaglia)
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(Editing by George Hay and Streisand Neto)
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