After weeks of rumors and speculation about talks between PPD and Carlyle, a deal was announced Oct. 3: Carlyle and Hellman & Friedman will acquire the 25-year-old CRO’s outstanding common shares for $33.25 per share in cash, a premium of 29.6% over PPD’s closing price Sept. 30. The deal is valued at $3.9 billion.
PPD founder and executive chairman Fred Eshelman, in an internal memo to employees, said, “This transaction provides an attractive return for our shareholders, especially at a time of significant market volatility and investor uncertainty. It also provides PPD with the opportunity to pursue its long-term business strategy as a private company under the ownership of two leading global investment firms and a solid platform for continued growth for our employees and clients.”
The deal values PPD at 11.7 times earnings before interest, taxes, depreciation and amortization, which, said Fairmount Partners managing director Neal McCarthy, is very positive for PPD and for the CRO sector.
“The good news is that this is another data point that says the public market is under-valuing CROs,” said McCarthy. “It says that private equity firms are doing their homework and they believe the public market has not given these companies as much value as they deserve.”
Still, Bloomberg News reported the deal’s price falls short of the $34 to $35 per share PPD was hoping to get, according to a person with direct knowledge of the negotiations who asked not to be named. In addition, two unnamed sources reported that Carlyle needed to raise equity from Hellman & Friedman because banks otherwise wouldn’t have provided financing, Bloomberg reported.
What will change for the CRO once the deal closes? Not a thing, assured Eshelman in his memo to employees.
“Nothing will change in our day-to-day operations as a result of this transaction,” the memo read. “Our management team is working closely together to ensure the company remains focused on our current objectives and strategy. We believe the experience and leadership skills of our senior management team, including CEO Ray Hill, and all of our employees will add great value as we navigate through this transition.”
Eshelman owned 6.5% of PPD’s common stock, making him the largest shareholder after Boston-based Wellington Management.
Rumors had been circulating all summer that PPD was for sale, and in July PPD released a statement saying, “We are looking at our long-term plan and our capital structure to see if there are any actions which might create value at this time.” On Aug. 16, Bloomberg reported unnamed sources saying the lead contender was Washington, D.C.-based Carlyle, which had bested bids from companies including Blackstone Group and KKR, with most offers then coming in between $33 and $38 a share. Since August, though, equity markets have fallen and leveraged buyout financing costs have increased.
On Sept. 16, with no official news on a deal with Carlyle, PPD announced it had hired a CEO after eight months without one. This confused some industry observers, who thought perhaps such an announcement meant the deal with Carlyle (and/or other private equity investors) might be off. Just over two weeks later, PPD announced the deal.
PPD has 11,000 employees in 44 countries and reported earnings of $127.7 million in 2010, on revenue of $1.47 billion. Carlyle Partners is a $13.7 billion U.S. investment fund, and Hellman & Friedman Capital Partners VII is an $8.9 billion fund.
The last 18 months has seen a rash of CRO-private equity firm activity. In May, CCMP Capital bought Medpace. In April, Nautic Partners acquired Omnicare Clinical Research. In December 2010, Warburg Pincus purchased RPS. Last August, Avista Capital acquired INC Research, which then bought Kendle International in May. Thomas H. Lee Partners acquired inVentiv in May 2010, and then inVentiv bought i3 in January and recently completed its purchase of PharmaNet. Now, PPD will join that list.
Deals like this one are making it increasingly difficult for those in the financial sector to come up with accurate comparables on other CROs, a concept similar to what’s done in real estate.
“It’s going to make it harder to value companies if you don’t have any on the public markets anymore,” said McCarthy. “There used to be at least 10 I could look at, and because they were public, there was a treasure trove of information available. But we’re down to just a few clinically focused ones now, including Icon, Parexel and Covance.”
The acquisition is expected to close in the fourth quarter of 2011.