Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

News that health-care company Catalent is in play should be welcome tidings for its shareholders, including private-equity backer Blackstone Group.

The $3.8 billion developer of drug-delivery technology surged Wednesday and climbed further in early trading on Thursday after Reuters reported Swiss life-sciences company Lonza Group AG was interested in buying it. A sale would come just shy of two years after Blackstone took Catalent public following a 2007 buyout of the business from Cardinal Health. Price is reportedly a sticking point in the negotiations with Lonza. It's not clear what the prospective buyer was offering, but the good news for Catalent investors -- including Blackstone, which still has a 21 percent stake -- is that even a modest premium would create an appealing opportunity.

Fully Valued
After Catalent recovered some this year from a steep decline, analysts don't see much further upside potential for the company on a stand-alone basis.
Source: Bloomberg

A temporary shutdown of one of Catalent's manufacturing plants has dragged on longer than some initially expected, crimping the company's revenue and profit outlook for the fiscal year ending in June and creating an overhang on the stock. Foreign-exchange headwinds haven't helped. While Catalent has gained this year, it was still down about 17 percent as of Tuesday from its peak last August. Even then, analysts on average viewed the stand-alone company as fully priced. As Jefferies' David Windley put it last month, ``we are willing to wait for clouds to clear." 

A takeover may be shareholders' best bet of getting more bang for their buck right now. A standard 30 percent premium to Catalent's unaffected price would translate into a bid of about $37 a share. That's a higher than the company has ever traded in its short life as a public company and roughly 80 percent more than Catalent's IPO price. With that kind of offer, Blackstone's stake would be valued at about $960 million -- not too shabby and perhaps an ideal way to exit a holding the private-equity firm has been steadily winding down.

Another for the Tally?
A Catalent takeover would be one of the largest health-care deals of the year. A look at some of the biggest across pharmaceuticals, biotech and health-care products thus far.
Source: Bloomberg

The question is how Lonza plans to pay for a deal. Deutsche Bank notes the Swiss company could raise an additional $2.9 billion in debt by going up to a leverage ratio of 4 times the companies' combined Ebitda. That's well short of Catalent's about $5.5 billion enterprise value, signaling Lonza will need to pay for at least part of the deal using stock. That, too, is looking rather fairly valued, with analysts on average forecasting an about 3 percent drop in Lonza shares over the next year.

But arguably the combined company should command a high valuation. Combining Catalent's drug-delivery technology with Lonza's drug-ingredient development business makes sense. Lonza also has established experience working with biologic drugs (those made from living cells), an area where Catalent has been looking to expand. For Catalent's part, being part of a larger company could help smooth out some of the volatility in its diverse business and reduce the impact of things like factory closures.

Catalent has been very vocal about its interest in M&A as a buyer.  It may want to give some thought to turning itself into a seller.

Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director at Blackstone.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The issue involved capsules for one product being put in the processing area for a different product. Catalent has said it believes this was done maliciously by someone within the plant. 

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Brooke Sutherland in New York at

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Beth Williams at