Proposed disposal of Services Segment for ?87.5m

RNS Number : 9626I

Dechra Pharmaceuticals PLC

10 July 2013

 

NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN OR INTO ANY JURISDICTION WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OF THAT JURISDICTION

London, 10 July 2013

For immediate release

Dechra® Pharmaceuticals PLC

("Dechra" or the "Group" or the "Company")

Creation of a focused, specialist veterinary pharmaceuticals business through the proposed disposal of the Services Segment for £87.5 million

Summary

·      Strategic disposal to create a business focused on high margin, specialist veterinary pharmaceutical products, operating in a global market with attractive long term growth prospects.

·      Proposed disposal of National Veterinary Services, Dechra Laboratory Services and Dechra Specialist Laboratories (together, the "Services Segment") to Patterson Companies, Inc. for a total effective consideration of £87.5 million, payable in cash on completion (the "Disposal").

·      The Board believes that the Disposal is in the best interests of Shareholders as a whole for the following reasons:

- it enables Dechra to focus on its key strategic own branded veterinary products businesses, in line with the Board's stated strategy;

- the Pharmaceuticals businesses (together, the "Pharmaceuticals Segment") are higher margin, cash generative businesses, operating in a global market with attractive long term growth prospects;

- it provides Dechra with additional resources to continue the development of the Pharmaceuticals Segment, both organically and, potentially, by way of acquisition;

- there are no material synergies between the Pharmaceuticals Segment and the Services Segment and the Board considers that they would each benefit from increased management focus, which would be achieved through a separation of the businesses; and

- it represents an attractive opportunity to realise the value of the Services Segment, which competes in an increasingly international and competitive market.

·      Net cash proceeds will be used to reduce Dechra's net debt.

·      Strategy for the Continuing Group will be to continue the development of a high growth, cash generative specialist veterinary pharmaceutical products business, with the intention to increase investment in the Continuing Group's product development pipeline.

·      In view of its size, the Disposal is conditional, inter alia, upon the approval of Dechra Shareholders, and a circular containing further details of the Disposal and a Notice convening a General Meeting of the Company will be sent to Dechra Shareholders as soon as practicable.

·      Completion of the Disposal is currently expected to take place mid-August 2013.

·      Dechra has also separately today announced its pre-close trading update for the financial year ended 30 June 2013; the Group's preliminary results are expected to be announced on 3 September 2013.

Ian Page, Chief Executive Officer of Dechra Pharmaceuticals PLC, commented:

"The sale of our Services Segment represents a key strategic development for Dechra. It will create a focused, international, branded veterinary products business, with the resources to pursue further organic and acquisitive growth and thereby generate increased value for shareholders. I would like to take this opportunity, on behalf of the Board, to thank the management and employees of National Veterinary Services and Dechra Laboratories for their significant contribution and commitment to the Group. I believe that Patterson's international presence and sole focus on services will ensure a strong future for these businesses."

This summary should be read in conjunction with the full text of this announcement.

Conference call

A conference call for analysts and investors will be held at 8.00 a.m. BST today, 10 July 2013.

Dial-in details:
UK free phone:	[phone]
UK local:	[phone]
USA toll free:	[phone]
Tokyo:	[phone]
Password: "Dechra"

This announcement and the presentation materials are available at http://www.dechra.com

A recording of the call will be available on the Company's website as soon as practicable after completion of the call.

Enquiries:
Dechra Pharmaceuticals PLC	Tel: [phone]
Ian Page, Chief Executive Officer Anne-Francoise Nesmes, Chief Financial Officer
Investec Bank plc (Financial Adviser, Broker and Sponsor) Chris Treneman James Rudd Cara Griffiths	Tel: [phone]
TooleyStreet Communications (PR Adviser) Fiona Tooley	Tel: [phone]

This announcement has been issued by, and is the sole responsibility of, Dechra.

Investec Investment Banking, a division of Investec Bank plc, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority ("FCA") and the Prudential Regulation Authority, is acting exclusively for Dechra Pharmaceuticals PLC in relation to the disposal of the Services Segment. Investec Investment Banking is not acting for any other person and Investec Investment Banking will not be responsible to any person other than Dechra Pharmaceuticals PLC for providing the protections afforded to clients of Investec Investment Banking or for providing advice in relation to the Disposal or in relation to the contents of or any transaction or arrangement referred to in this announcement.

Forward-looking statements

Certain statements made in this announcement constitute forward-looking statements. Forward-looking statements can be identified by the use of words such as "may", "will", "should", "predict", "assurance", "aim", "hope", "risk", "expect", "intend", "estimate", "anticipate", "believe", "plan", "seek", "continue" or other similar expressions that are predictive or indicative of future events. All statements other than statements of historical facts included in this announcement, including, without limitation, those regarding the Group's expectations, intentions and beliefs concerning, amongst other things, the Group's results of operations, financial position, growth strategy, prospects, dividend policy and the industries in which the Group operates, are forward-looking statements. By their nature, such forward-looking statements involve known and unknown risks, uncertainties and other factors, many of which are outside the control of the Group and its Directors, which may cause the actual results, performance, achievements, cash flows, dividends of the Group or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. As such, forward-looking statements are no guarantee of future performance.

Such forward-looking statements are based on numerous assumptions regarding the Group's present and future business strategies and the environment in which the Group will operate in the future. Among the important factors that could cause the Group's actual results, performance or achievements to differ materially from those in the forward-looking statements include, among others, economic conditions in the relevant markets of the world, market position of the Company or its subsidiaries, earnings, financial position, cash flows, return on capital and operating margins, political uncertainty, the actions of competitors, activities by governmental authorities such as changes in taxation or regulation, changing business or other market conditions and general economic conditions and such other risk factors as may be identified in the "Risk Factors" section of the Circular. Forward-looking statements should, therefore, be construed in light of such risk factors and undue reliance should not be placed on forward-looking statements. These forward-looking statements speak only as of the date of this announcement and are not intended to give assurance as to future results. The Group will update this announcement as required by applicable law, including the City Code, Listing Rules, Prospectus Rules and/or the Disclosure and Transparency Rules of the Financial Conduct Authority, but otherwise expressly disclaims any such obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in Dechra's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Dechra® Pharmaceuticals PLC

("Dechra" or the "Group" or the "Company")

Creation of a focused, specialist veterinary pharmaceuticals business through the proposed disposal of the Services Segment for £87.5 million

1.   Introduction

The Board of Dechra announces it has today entered into a conditional agreement (the "Disposal Agreement") for the sale of Dechra's Services businesses, namely National Veterinary Services ("NVS®"), Dechra Laboratory Services and Dechra Specialist Laboratories (together, the "Services Segment") to Patterson Companies, Inc., for a total effective consideration of £87.5 million (the "Disposal"). Following the Disposal, Dechra will be a focused, high margin specialist veterinary pharmaceutical products business, operating in a global market with attractive long term growth prospects.

The Consideration is payable in full and in cash at Completion and is subject to customary adjustments for a normalised level of working capital and net debt. The Disposal will be effected through the sale of the entire issued share capital of National Veterinary Services Limited, a newly-incorporated, wholly-owned subsidiary of Dechra Pharmaceuticals PLC, to Patterson Companies, Inc. The trade, assets and liabilities (save for certain excluded liabilities) of the Services Segment that were owned by Dechra Limited have been transferred into National Veterinary Services Limited in order to facilitate the Disposal.

In view of its size, the Disposal constitutes a class 1 transaction for Dechra under the Listing Rules and is therefore conditional, inter alia, upon the passing of a resolution to approve the Disposal (the "Resolution") by Dechra Shareholders at a General Meeting of the Company (the "Meeting"). Accordingly, a circular containing further details of the Disposal and a Notice convening the Meeting (the "Notice of Meeting") will be sent to Shareholders as soon as practicable.

2.   Background to and reasons for the Disposal

When Dechra was established in May 1997 through a management buyout from Lloyds Chemist plc, it comprised three main businesses, (i) NVS, a distributor of pharmaceuticals and pet products, instruments, consumables, accessories and IT services to veterinary practices, (ii) Arnolds, a supplier of own-branded pharmaceutical instruments and equipment to the veterinary profession, and (iii) Dales®, the licensed manufacturer of human and veterinary pharmaceuticals. At that time, NVS contributed the majority of Dechra's revenues, profits and cash generation. Following the flotation of Dechra on the London Stock Exchange in September 2000, the Board adopted a strategy to use the cash generated by NVS to invest in the development of specialist companion animal pharmaceutical products, which represented a significant growth opportunity for the Group.

Since 2000, Dechra's Pharmaceuticals businesses (the "Pharmaceuticals Segment") have grown both organically and through a number of key strategic acquisitions that have enabled Dechra to access new products and/or geographies. The success to date in delivering the Group's strategy to develop a high margin, cash generative veterinary products business is illustrated by the fact that over 75 per cent. of the Group's operating profits (excluding amortisation of intangibles and before allocation of central costs) in the half year ended 31 December 2012 were derived from the Pharmaceuticals Segment. The Board believes that the Pharmaceuticals Segment, where the greatest opportunities for future growth and value lie, is now of a size that permits the Group sensibly to focus its entire efforts on its further development.

The Board believes that the Disposal is in the best interests of Shareholders as a whole for the following reasons:

·      it enables the Continuing Group to focus on its key strategic own branded veterinary products businesses, in line with the Board's stated strategy;

·      the Pharmaceuticals Segment comprises higher margin, cash generative businesses, operating in a global market with attractive long term growth prospects;

·      it provides Dechra with additional resources to continue the development of the Pharmaceuticals Segment, both organically and, potentially, by way of acquisitions;

·      there are no material synergies between the Pharmaceuticals Segment and the Services Segment and the Board considers that they would each benefit from increased management focus, which would be achieved through a separation of the businesses; and

·      it represents an attractive opportunity to realise the value of the Services Segment, which competes in an increasingly international and competitive market.

Following the Disposal, the Continuing Group will be a focused specialist veterinary pharmaceuticals business, operating through three of Dechra's existing Pharmaceuticals segments, namely (i) Product Development, which develops and licenses Dechra's own branded veterinary product portfolio of novel and generic pharmaceuticals and specialist pet diets; (ii) European Pharmaceuticals, which comprises Dechra Veterinary Products EU and Dechra Pharmaceuticals Manufacturing; and (iii) US Pharmaceuticals, which comprises Dechra Veterinary Products US.

Following the Disposal, the Board will continue the development of a high growth, cash generative, specialist veterinary pharmaceutical products business to compete in a global market, with the intention to increase investment in the Continuing Group's product development pipeline.

3.   Information on the Services Segment

The Services Segment comprises the following businesses:

(i)       National Veterinary Services

NVS is the UK market leader, in terms of market share, in the supply and distribution of veterinary products to veterinary practices and other approved outlets via its next day national delivery service. NVS stocks a range of over 14,000 products, including pharmaceuticals, pet products, consumables and accessories and has also developed a range of IT solutions for veterinary practices. Additionally, NVS supplies a range of business solutions for veterinary practices including practice management software, benchmarking systems and marketing and business support.

(ii)      Laboratories

Dechra Laboratory Services ("DLS")

North Western Laboratories Limited was established in 1983 as an independent veterinary laboratory providing diagnostic services for veterinary surgeons throughout the UK and became a part of the Dechra Group in April 2002. In April 2012, the business changed its trading name to Dechra Laboratory Services and operates as a multi-disciplined, independent commercial veterinary laboratory. Both its laboratory sites, in Poulton-le-Fylde and in Leeds, are UKAS accredited testing laboratories and offer over 600 test options across the full range of clinical pathology disciplines and diagnostic services to UK commercial veterinary practices. DLS historically provided support to companion animal practices; however, in the last two years DLS has introduced an increasing range of large animal and equine services.

Dechra Specialist Laboratories ("DSL")

Cambridge Specialist Laboratory Services, which was also acquired by the Group in April 2002, was formed in 1998 by a small group of scientists and technicians with experience in veterinary diagnostics and radioimmunoassay. In April 2012 Cambridge Specialist Laboratory Services changed its trading name to Dechra Specialist Laboratories and operates as a primary and secondary referral, specialist veterinary immunoassay laboratory. Although it provides some first level support to UK veterinary practices, DSL's major area of specialisation is in very precise endocrine assays.

4.   Financial summary of the Services Segment

The following information relating to the Services Segment has been extracted without material adjustment from the consolidation schedules used in preparing the Group's audited consolidated financial statements for the financial years ended 30 June 2010, 30 June 2011 and 30 June 2012 and the unaudited financial information for the six month period ended 31 December 2012.

	Year ended 30 June 2010 (unaudited)	Year ended 30 June 2011 (unaudited)	Year ended 30 June 2012 (unaudited)	Half year ended 31 December 2012 (unaudited)
	£'000	£'000	£'000	£'000
Revenue	285,670	296,258	315,672	167,739
Operating profit	13,103	13,087	11,056	5,720
- Operating profit margin	4.6%	4.4%	3.5%	3.4%
Profit before tax	13,468	13,437	11,146	5,723
			As at 30 June 2012 (unaudited)	As at 31 December 2012 (unaudited)
			£'000	£'000
Net assets			55,363	59,338

5.   Use of proceeds and financial effects of the Disposal on Dechra

The net cash proceeds arising from the Disposal are expected to be approximately £86.2 million, after estimated transaction costs of £0.9 million and tax arising on disposal of £0.4 million. It is intended that the net cash proceeds from the Disposal will be used to reduce the Group's net debt through the prepayment and cancellation of the Group's existing £50 million term loan facility and the reduction in amounts drawn down under the Group's existing £65 million revolving credit facility. The Continuing Group will retain the use of the existing £65 million revolving credit facility, which expires in October 2016, on an ongoing basis to fund the development of the business. Following Completion, the Continuing Group is expected to have pro forma net debt of £15.7 million, based on the Group's position as at 31 December 2012.

It is expected that central costs incurred by the Continuing Group will increase following the Disposal, reflecting some additional cost and the fact that central costs were previously allocated across both segments.

Whilst the Disposal will be earnings dilutive in the short term, it will create a focused, specialist pharmaceuticals business with additional resources to invest in the Continuing Group's product development pipeline and other growth opportunities. The Board expects the quality of the Continuing Group's business and its prospects to be enhanced as a result of the Disposal, which will enable management to focus exclusively on the areas of the Group with the strongest margin, cash conversion and growth prospects.

6.   Dividends and dividend policy

Following the Disposal, the Board intends to maintain its progressive dividend policy, which takes into account both the underlying performance of the Group and investment opportunities.

7.   Key terms of the Disposal Agreement

The Disposal is being made pursuant to the Disposal Agreement. Under the Disposal Agreement, Dechra Limited, a wholly-owned subsidiary of Dechra Pharmaceuticals PLC within which the business and assets of the Services Segment were legally held, has agreed to sell the entire issued share capital of National Veterinary Services Limited for an effective consideration of £87.5 million. The consideration is payable in cash on completion. The consideration is subject to customary adjustments to reflect the net debt position and movements to normalise the working capital of National Veterinary Services Limited.

The Disposal Agreement contains certain warranties and indemnities on the part of Dechra Limited which are customary for a transaction of this nature. Completion of the Disposal is conditional, inter alia, on (i) the passing of the Resolution at the Meeting; and (ii) the issue of certain regulatory licences in the name of National Veterinary Services Limited.

8.   Expected timetable to Completion

A circular, which contains further details of the Disposal and the Resolution, the Board's recommendation to vote in favour of the Resolution, and the Notice of Meeting, will be sent to Dechra Shareholders as soon as practicable. Completion of the Disposal is expected to occur mid-August 2013.

The release, publication or distribution of this announcement in jurisdictions other than the United Kingdom may be restricted by law and therefore any persons who are subject to the laws of any jurisdiction other than the United Kingdom should inform themselves about, and observe, any applicable requirements. This announcement has been prepared for the purposes of complying with the Listing Rules and the information disclosed may not be the same as that which would have been disclosed if this announcement had been prepared in accordance with the laws and regulations of any jurisdiction outside of England.

This announcement is not intended to, and does not constitute, or form part of, any offer to sell or an invitation to purchase or subscribe for any securities or a solicitation of any vote or approval in any jurisdiction. Dechra Shareholders are advised to read carefully the formal documentation in relation to the Disposal once it has been despatched. Any response to the proposals should be made only on the basis of the information in the formal documentation to follow.

Capitalised terms not otherwise defined in this announcement have the meanings given to them in the Circular.

 

END

 

 

DISLFFVFDAIAIIV