Dechra/EQT: Expect competition officials to investigate drug takeover of pets

The Norse goddess Freya rode in a chariot drawn by cats. Sweden’s EQT has borrowed the name for its bid company to buy veterinary drug maker Dechra for £4.9bn including debt. On Friday, the London-listed group’s board recommended the offer, which is a 40 per cent premium to the three-month unhindered share price. There seems to be an obedient grumble from shareholders given the deteriorating outlook for vet and pet products.

Dechra is a long running success story. Listed at the turn of the millennium, it flourished under the leadership of chief executive Ian Page. The nearly 50x total return since 2000 has outperformed the UK pharma and biotech sectors by more than 10x. While its loss is a blow to the dwindling UK market, the offer is good enough to seal the deal.

The price trades at 25 times Dechra’s estimated EBITDA over the next 12 months. The offer is 5 percent lower than an initial one in April, before it warned about US destocking and vulnerable EU trade. It said on Friday that operating profit would be “materially” down from the £186 million forecast in February.

It can push many higher. But it will still trade below the 29 times forward EBITDA at which US-listed Pfizer spin-off Zoetis trades. The higher profit margin of the latter explains the difference.

Competition regulators could present an obstacle given EQT’s already large footprint in the pet and vet sector. EQT says it has no plans to combine Dechra with IVC Avidencia, a business of 2,500 veterinary centers across Europe, with other private equity groups. But the UK’s Competition and Markets Authority is already concerned about horizontal integration in veterinary care. Nearly half of the UK’s independent vets have been created by large groups over the past decade.

The vertical overlap between Dechra and IVCE may impact the interest of the CMA. Perhaps Hamingja – Norse Luck – would have been a better name for the company making the bid to complete the deal.