November 19, 2013 / 8:18 PM / 5 years ago

DSM to fold pharma arm into venture with private equity firm

AMSTERDAM/TORONTO (Reuters) - Dutch food and chemicals group DSM (DSMN.AS) will spin off its pharmaceuticals unit into a new joint venture majority-owned by private equity firm JLL Partners as the company shifts its focus toward higher-margin products.

New York-based JLL will merge the DSM business with that of Toronto-based drug maker Patheon Inc PTI.TO, forming a joint venture boasting some $2 billion in annual sales that the companies said on Tuesday will be a leader in manufacturing medicines for pharmaceutical companies.

As part of the deal, JLL, which already owns 55.7 percent of Patheon, has offered to acquire the remaining stock for $9.32 a share - a 64 percent premium to its closing price on Monday. The deal values Patheon at about $1.36 billion.

Patheon’s Chief Executive Jim Mullen, who is going to be CEO of the new venture, said the deal will create an entity with a broad footprint spanning 23 sites across North America, Australia, Europe and Latin America.

“Our customers have indicated a strong desire to streamline their outsourcing network, and at the same time, increase their outsourcing,” Mullen said on a conference call. “They want to work with fewer companies with broader capabilities.”

JLL will own a 51 percent interest in the new venture that is yet to be named, with DSM owning the remainder. JLL is contributing $489 million in cash to the new venture, while DSM is vesting its pharma arm and will receive a sellers note of $200 million as part of the deal.

DSM shares rose nearly 4 percent to an all-time high of 60.2 euros after the deal was announced, while Patheon’s Toronto-listed shares rose to an eight-year high of $9.66 on Tuesday.


DSM, the world’s No. 1 vitamin maker, has spent more than 2.2 billion euros ($3 billion) since 2010 buying into less cyclical businesses such as food ingredients and high-end plastics, and moving away from lower-margin bulk chemicals.

Tuesday’s deal resolves issues with its drugs business and leaves one other major problem - how to cut its exposure to low-margin caprolactam, the raw material for a type of nylon.

In a note to clients, Deutsche Bank analyst Martin Dunwoodie said the proposed deal is strategically logical.

“The transaction is welcome and in line with DSM’s stated intention to find a DSM pharmaceutical products business. The combined business would have the necessary scale and market positions and geographic presence required for the growth.”

The new company will have sales of about $2 billion in 2014 and it will supply customers with a range of products, from intermediates such as antibodies, proteins and enzymes to finished medication.

DSM’s pharma division - a top supplier of ingredients in beta lactam antibiotics - had annual sales of 543 million euros and the group recently indicated it wanted a financially strong partner that could help it to expand in Asia.

On a conference call with analysts, DSM’s Chief Financial Officer Rolf-Dieter Schwalb said that the new company will add to DSM’s earnings from 2015 and would be a strong, standalone business with an interest in expanding through acquisitions and no need for cash injections from either shareholder.

J.P. Morgan advised DSM on the pharma deal, while Morgan Stanley and Jefferies advised JLL. RBC Capital Markets and BMO Capital Markets advised Patheon on the deal.

The transaction is being financed through a combination of committed debt and equity financing. The debt financing of $1.65 billion has been committed by JPMorgan, UBS, Jefferies, Morgan Stanley and KeyBank. The equity financing includes an aggregate contribution of $489 million from entities affiliated with JLL.

($1 = 0.7394 euros)

Editing by Louise Ireland and Krista Hughes

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