Clayton, Dubilier & Rice/UDG: US buyout firm seeks healthy returns

Big pharma is good at coming up with new and specialised treatments to improve healthcare. Getting products into the hands of patients, however, can be difficult and costly. Specialists offer a way to outsource the problem. A growing propensity to do just that has attracted the attention of private investors. London-listed UDG Healthcare agreed on Wednesday to a £2.8bn all-cash offer from US buyout firm Clayton, Dubilier & Rice. The price could do with a shot in the arm.

UDG is more sharp suits than white coats. It deals with aspects of drug delivery such as licensing and communications through its Ashfield division. Growth has come via bolt-on acquisitions from fragmented markets. CD&R will continue that pattern. It has plans to integrate Ashfield with Huntsworth, a similar UK business it acquired last year. That will add clout in a consolidating sector. The modest price paid for Huntsworth likely helped UDG receive a better offer.

CD&R’s offer represents a 30 per cent premium to UDG’s three-month share price, or about 17 times market expectations for this year’s ebitda. Shares have traded at that level in the past — but not since 2018. It looks generous compared with the £524m CD&R paid for Huntsworth — equal to less than 10 times forward ebitda. UDG’s valuation is boosted by its packaging manufacturing division Sharp, which represents a third of revenues and higher margins than Ashfield.

Huntsworth and Ashfield should prove a profitable pairing for CD&R. While the latter is a bigger business, ebitda margins of 16 per cent lag behind those of its smaller future partner by 2 percentage points. Improving Ashfield by a similar amount would take the blended group margin to 21 per cent. Once complete, and assuming two-thirds of the initial £3.3bn price was paid in debt and a 17 times exit multiple, CD&R would double its initial equity investment.

That might take five years to do. But it would be about a quarter above the total return for UDG shareholders in the preceding five years if they accept CD&R’s offer. With that in mind, the right course of treatment for UDG investors is to push for a higher price.

If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline.