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Lonza Focuses on Health With $5.5 Billion Deal for Capsugel

  • Acquisition will be largest since 2011 Arch Chemicals purchase
  • Buying U.S. capsule maker comes after Lonza restructuring

Lonza Group AG agreed to buy U.S. capsule maker Capsugel SA from KKR & Co. for $5.5 billion, as the Swiss biotech and specialty chemicals company seeks to focus more on health care.

The price includes refinancing of existing Capsugel debt of about $2 billion, Basel-based Lonza and Capsugel, which has headquarters in Morristown, New Jersey, said in a statement Thursday, adding that the deal will be financed by a combination of debt and equity raising of as much as 3.3 billion francs ($3.2 billion). Lonza shares dropped as much as 7 percent.

“We like the logic of the deal but think it is not a bargain,” Laura Lopez Pineda, an analyst at Baader Bank, said in a note. “The pending capital raise will weigh on Lonza’s stock.”

Capsugel accelerates Lonza’s health-care strategy “by giving us broader exposure to the fast-growing pharma and consumer health-care markets,” Lonza Chief Executive Officer Richard Ridinger said in the statement. The Swiss company said it will keep its dividend policy, with the transaction expected to close in the second quarter of 2017 and add to core earnings per share in the first full year after closing.

Watch more: Lonza executives hold a press conference in Basel at 10:45 CET.

KKR will score about a $3 billion profit on its investment, a person familiar with the matter said. The New York-based private equity firm acquired Capsugel for $2.4 billion from Pfizer in 2011, investing about $1.1 billion of equity. The profit includes dividends KKR took, the person said, asking not to be identified as the details aren’t public.

About-turn

Lonza’s move to acquire Capsugel comes as CEO Ridinger refocuses strategy on higher-margin health care and pharmaceuticals, an about-turn from his predecessor, who sought to reduce Lonza’s reliance on the sector with the $1.4 billion acquisition of Arch Chemicals Inc. in 2011. Now in his fifth year at the helm after leading Lonza through a period of restructuring, Ridinger is betting drug companies will outsource more manufacturing.

To read more about Lonza’s businesses and earnings, click here

Lonza expects to achieve about 100 million francs in top-line synergies in the mid to long-term, the statement said, adding that annual operating synergies of 30 million francs and tax synergies of 15 million francs are also expected by the third year.

Capsugel makes products used for dosages of medicines and vitamins including the manufacture of 200 billion hard capsules annually as well as various forms of liquids, tablets and powders, according to its website. Capsugel has 13 manufacturing sites around the world.

Lonza traded 6.3 percent lower at 158.71 francs as of 4:24 p.m. in Zurich.

Earlier this year, Lonza agreed to buy nutritional ingredients maker InterHealth Nutraceuticals for as much as $300 million from private equity firm Kainos Capital. The Swiss company has produced vitamin B3 and food emulsifiers for more than 40 years.


Fourth Largest

The $3 billion gain is the fourth largest KKR has reaped on a leveraged buyout over the last decade, according to the person familiar with the matter. KKR’s exits from hospital operator HCA Holdings Inc., discount retailer Dollar General Corp. and U.K. drugstore operator Alliance Boots Plc earned more, the person said.

Capsugel’s revenue since 2011 has climbed nearly 50 percent to $1.1 billion, while earnings before interest, taxes, depreciation and amortization almost doubled to $375 million, the person said.

Fueling the growth, according to Pete Stavros, who heads industrial investments at KKR and led the Capsugel deal, were technological advances in drug delivery, including capsules developed by Capsugel that release their contents at specific times.

The ability to tailor delivery capabilities to pharmaceutical makers’ needs “helped us increase sales to the same set of customers,” Stavros said in an interview. “That was a step change for the company.”

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