Specialist services provider to the pharmaceutical industry, Ergomed (ERGO:AIM) has agreed an all-cash offer from private equity firm Permira pitched at a 28.3% premium to the prior closing price on 1 September 2023.

The shares jumped 27% to £13.33 in early trading, roughly 1% below the cash offer of £13.50 suggesting investors believe the deal will be successful. The proposed takeover price is around 10% below the all-time high reached in late 2021.

Ergomed has been one of the best performing healthcare shares on the UK market, gaining around 780% over the last five years.

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Founder and largest shareholder Miroslav Reljanović who owns 18% of Ergomed’s shares has irrevocably tendered his stock while the directors have unanimously recommended the deal to shareholders.

WHY DO THE DIRECTORS RECOMMEND THE OFFER?

The directors believe the implied takeover valuation represents a ‘highly attractive’ deal for shareholders and is at the high end of similar public transactions.

The proposed acquisition values Ergomed at a ratio of 24 times enterprise value to adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) on an historical basis and 21 times forecast adjusted EBITDA for the year to 31 December 2023.

Enterprise value is total value of the business including net debt. As an alternative to the cash offer, shareholders can also elect to receive 451p per share in cash plus unlisted securities.

This allows shareholders to participate in the recapitalised Ergomed group and get continued economic exposure to a ‘private equity owned enterprise without incurring ongoing management fees’.

It also allows shareholders to participate in future value creation which may ultimately deliver greater value than the full cash offer, but the company points out there are no guarantees.

The downside is that the unlisted shares will not be liquid and are subject to a five-year lock-up.

WHAT ARE THE EXPERTS SAYING?

Healthcare analyst Sean Conroy at Shore Capital said he views the cash offer as an attractive opportunity to lock in returns.

‘In a fragmented sector ripe with consolidation, we had previously highlighted Ergomed could potentially be predator or prey, and we note multiple listed contract research organisations have been taken private in recent history,’ said Conroy.

Conroy calculates the proposed deal implies a valuation premium of around 30% to the contract research organisation peer group average, which can be justified given Ergomed’s ‘dependable’ growth profile.

LEARN MORE ABOUT ERGOMED

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