TheChek News Flow

Mylan, the generic drugmaker, is poised to announce a takeover of Sweden’s Meda, according to people briefed on the deal.

The takeover of Meda, which has a market value of roughly SEK 31.4bn, or $3.7bn, could be announced later today*.

Mylan first tried to buy Meda in 2014, but its offer was rejected, write David Crow, Arash Massoudi, and Andrew Ward.

The company, one of the world’s largest makers of copycat generic drugs, has been looking for a deal since it failed to buy Perrigo in a $27bn hostile takeover last year.

The deal ends a three-year saga during which Meda rejected a previous $9bn bid from Mylan as well as an approach from Sun Pharma of India. The Swedish company instead pursued its own expansion with a $3.1bn acquisition of Rottapharm of Italy in 2014 and its chief executive, Jörg-Thomas Dierks, declared: “Either you eat or you will be eaten”.

The sale of Meda risks a further hollowing out of Sweden’s pharmaceuticals sector, which in the past two decades has seen Pharmacia bought by Pfizer of the US and Astra merged with Zeneca of the UK.

The company’s biggest shareholder with 23 per cent is Stena Sessan, the Swedish shipping group controlled by the Olsson business family.

Generic drugmakers, which produce cheap, off-patent medicines, have been at the heart of the wider boom in pharmaceuticals dealmaking over the past two years as manufacturers have sought greater scale and efficiency. Other transactions have included the $41bn acquisition of Allergan’s generics business by Teva of Israel, the world’s biggest generics maker by sales.

US and European generic drugmakers have been facing increasing low-cost competition from Indian rivals and pressure on pricing as governments seek to contain rising healthcare costs.

* Timing of departure news said to be unfortunate

* FTC review almost complete

Williams’ shareholder vote in late March at earliest

Energy Transfer Equity (NYSE:ETE) CFO Jamie Welch’s sudden departure was unrelated to its pending bid for Williams Companies (NYSE:WMB), said two sources familiar with the situation and a sector advisor.

On 5 February, Welch stepped down from his position and was replaced by Thomas Long, CFO of Energy Transfer Partners (NYSE:ETP). Energy Transfer subsequently issued an 8-K on 8 February, stating that the replacement was not based on “any disagreement with respect to any accounting or financial matter,” and the company was working to retain Welch as a consultant on the company’s LNG export project.

Since Welch’s departure was announced Friday after market close, Energy Transfer units have lost nearly 35% of their value. On Tuesday, the units gained 12.8% to close at USD 4.57 per unit.

The timing of the departure announcement was “unfortunate,” said the first source familiar. Although Williams shareholders may have been “spooked” by the CFO situation, the same source said it was not enough to dissuade them from pressing ahead with the deal.

The second source familiar said investors were reading too much into Welch’s departure.

Energy Transfer did not respond to requests for comment, while Welch could not be immediately reached for comment.

The second source familiar and advisor described Welch as the key orchestrator and driving force on the Williams deal.

Welch joined Energy Transfer from investment bank Credit Suisse in 2013. He began his business career as a project finance lawyer in Australia before working in New York and London. New CFO Long has been with the Energy Transfer family of companies since 2010 and is a CPA who has worked in US power and energy corporations since 1998.

Given the dramatic 82% decline in Energy Transfer’s valuation since the deal was announced, the company would want to renegotiate the Williams deal, despite the many challenges, this news service previously reported on 22 January. The second source familiar said at this point terms of the deal have not been discussed for re-evaluation.

At the same time as Welch’s departure, Energy Transfer was hit with renewed concerns over Williams’ exposure to Chesapeake Energy (NYSE: CHK), which sister publication Debtwire reported on Friday had retained a law firm to advise on debt restructuring.

For Williams shareholders, the USD 8 per share cash component of the deal remains “pretty attractive,” said the first source. In addition, a combination with Energy Transfer could lessen exposure to Chesapeake, because Williams would be joining a more diversified group of businesses, the first source familiar said.

Williams has around USD 1bn in annual earnings exposed to Chesapeake, said the first source familiar. In a worst-case scenario in which Chesapeake declares bankruptcy, looks to renegotiate contracts and those renegotiations are upheld, the outcome will be likely painful to Williams but not necessarily catastrophic, he said. The Chesapeake exposure represents less than a quarter of Williams’ annualized earnings based on its past four quarters.

Williams declined to comment.

A third source familiar with the situation agreed that the biggest concern for Williams is whether Chesapeake would decline to pay the higher rates in its contract with Williams when there is a surplus of cheaper capacity available in the present market.

The transaction is still subject to Williams’ shareholder vote, which has not been scheduled. The second source familiar said a shareholder vote has not been set yet as the parties wait to receive direction from the Federal Trade Commission’s review of the deal, which is understood to be nearly complete.

The first source familiar said the earliest Williams could hold its shareholder vote is at the end of March, but that it is likely to be held later.

* Buyers lukewarm on valuation

* Declining financials an issue

Emerson Electric (NYSE:EMR) has held soft conversations with prospective buyers of its network power business since late last year, said four sources briefed on the matter.

A number of private equity firms have been evaluating the business, but the sponsors have shown lukewarm interest in the assets, these sources said. There may also be a short list of strategics interested in the network power unit, one of the sources added.

In June, Emerson announced plans to spin off network power. It concurrently announced it would be exploring strategic alternatives for its motors and drives, power generation and remaining storage businesses.

The industrials group is not running a formalized sale process for network power, the sources said. Still, they said Emerson appears to prefer a sale.

JPMorgan and Centerview Partners are advising Emerson. The transactions are expected to be completed by 30 September, the company’s fiscal year end.

In response to a question regarding the timeline of the network power separation, Emerson CEO David Farr said on the company’s fiscal 1Q16 earnings call last week that there was no delay. He noted that the company can go down the path of looking at strategic buyers for the business or pursue a straight spin.

Emerson noted in its most recent 10-Q that the company has received inquiries which could potentially lead to separation of the network power systems business through a sale.

Several of the sources briefed said Emerson is angling for a price in the USD 4bn-USD 5bn EV range. All of the sources said this was a tough ask, with one noting that no buyers, to his knowledge, are considering a valuation near this range.

Emerson likely wants a high price to take into account the capital it has invested in network power through acquisitions, one of the sources said.

A USD 5bn valuation would have been reasonable when network power had double-digit EBITDA margins and stable-to-slight growth, another one of the sources said.

Network power generated approximately USD 450m-USD 475m of EBITDA for 2015, according to one of the sources briefed. “I could see [a multiple] as low as 5x or as high as 8x,” said the same source, adding that the higher end of the range would be likelier if the business demonstrated revenue and margin stability. Another source said the EBITDA figure is moving around.

Since 2011, when network power reported USD 6.8bn in sales following major purchases, the business has seen its revenues consistently decline. This is attributed to a combination of factors including divestitures, weakness in telecommunications and information technology end markets and geographic challenges, particularly tied to Europe.

For FY15, the unit reported USD 4.4bn in sales and a 5.2% margin, down from USD 6.1bn in revenue and a 9% margin for FY13.

In 2013, Emerson sold a 51% stake in its embedded computing and power business to Platinum Equity in return for approximately USD 300m in cash. Emerson retained a 49%, non-controlling interest in the business, which was previously part of network power. It has since been renamed Artesyn Embedded Technologies.

The subsequent year, Emerson sold Connectivity Solutions, also a part of Network Power, to Bel-Fuse (NASDAQ:BELF.B) for USD 98m.

Farr said on the conference call last week that Emerson had succeeded in stabilizing the earnings in network power. “I think if you look at the underlying order pace of our network power business, it's actually noses up.”

Part of the conundrum for potential network power buyers is trying to quantify how much more decline is left in the asset. “What multiple do you apply to a declining business?” questioned one of the sources.

Green shoots would include signs that network power is able to thwart competition from Asia and has leverage on product pricing, said the same source.

In addition to valuation, obtaining financing for a potential buyout of network power in the current market will likely prove difficult given the business may still erode and arguably lacks stability.

Beyond valuation complexities, any potential buyer would need to take on significant restructuring tasks, said one of the sources. Getting comfortable with this point may be harder for a buyer than the ultimate number ascribed to the business, he said.

Logical strategic suitors are few and include Eaton (NYSE:ETN), Schneider Electric (EPA:SU) and Taiwanese Delta Electronics (TPE:2308), said one of the sources. He downplayed the likelihood that ABB (NYSE:ABB) or General Electric (NYSE:GE) would pursue the business.

In 2010, Emerson completed the acquisition of UK-based uninterruptible power supply business, Chloride Group, for approximately USD 1.5bn. Emerson went toe-to-toe with ABB for the asset, which was ultimately added to network power. The deal came on the heels of Emerson purchasing Avocent in 2009 for USD 1.2bn.

Since the acquisition, Chloride Group hit macroeconomic winds affecting its profitability. In 2014, Emerson took a goodwill impairment charge of USD 508m.

Emerson declined to comment. The company is hosting an investor conference today, 10 February, and tomorrow, 11 February.