Sanofi sale is critical health check for mega LBOs
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Aimee Donnellan
LONDON, Oct 10 (Reuters Breakingviews) -Sanofi SASY.PA is about to deliver a critical health check to the buyout world. The $140 billion French pharmaceutical group is in talks with rival bidders Clayton Dubilier & Rice and PAI Partners to sell its consumer drugs unit for 15 billion euros, per Bloomberg reports. Whether CEO Paul Hudson goes ahead, or instead lists the division, will be a critical moment for private equity dealmakers.
Hudson unveiled his plan to offload the unit which makes ACT mouthwash last October, in order to raise cash for new drugs. But he kept open the possibility of listing it instead of a sale. A buyout would mark a departure from other recent deals in the sector: GSK GSK.L chose to float its consumer unit Haleon HLN.L in 2022, as did Johnson & Johnson JNJ.N in May last year.
A sale to private equity would also highlight how debt markets have recovered from 2022, when a surge in interest rates and war in Ukraine left banks stuck holding unsold loans. The volume of buyouts has already surpassed 2023’s total of $562 billion, LSEG data shows. But to get the Sanofi deal away, banks including Goldman Sachs GS.N and Morgan Stanley MS.N are lining up a package of loans worth around 9 billion euros, with leverage around 7 times EBITDA. The size of the deal and gearing levels are at the upper limit of what can be sold in European debt markets, according to bankers. The risk is that if markets turn, banks could get stuck holding the loans and have to sell them at a discount, as they did with the ill-fated Wm Morrison deal.
Such juicy leverage should at least mean CD&R and PAI stand a chance of making a good return. If the deal values the consumer drugs unit at the reported 15 billion euros, it would be equivalent to nearly 13 times last year’s EBITDA of 1.2 billion euros. Assume EBITDA grows at around 5% annually, the average for Haleon according to LSEG forecasts, and that the buyers sell in five years on Haleon’s current 14 times enterprise value to EBITDA multiple. The unit would then be worth over 21 billion euros including debt, and the new owners would have more than doubled their equity investment. That’s according to a Breakingviews calculation that assumes they use free cash flow to pay down debt, while investing 200 million euros of capital expenditure each year.
Hudson might still try his luck in the equity markets and list the unit instead, especially with rival Haleon trading at a higher multiple than that apparently offered by the private equity bidders. But a sale would bring him certain cash at a time when the market for new listings is choppy. If the buyout goes ahead smoothly, it will show that debt markets are wide open, and corporates willing to sell. Private equity dealmakers’ animal spirits would get an extra shot in the arm.
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CONTEXT NEWS
Sanofi has received two separate bids from private equity firms for its consumer health unit, which could be valued at 15 billion euros ($16.74 billion) or more, Bloomberg reported on Sept. 24.
The drugmaker is still deciding whether to pursue a spinoff of the business if the bids aren’t attractive.
Both private equity firms named in the report, PAI Partners and Clayton Dubilier & Rice, declined to comment.
Graphic: Global buyout volumes are picking up https://reut.rs/3NmClIe
Editing by Neil Unmack, Streisand Neto and Oliver Taslic
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