Lonza
to buy U.S. drug capsules maker Capsugel from KKR for
$5.5 billion
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[December 15, 2016]
By Brenna Hughes Neghaiwi and Ludwig Burger
(Reuters) - Lonza Group AG announced its
biggest ever acquisition on Thursday with a deal to buy Capsugel, a U.S.
maker of capsule products and other drug delivery systems, for $5.5
billion in cash to broaden its product range as a pharmaceuticals
industry supplier.
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The Swiss company's shares fell by over 7 percent on the news to
around 157 Swiss francs ($154) on concerns that the acquisition,
costing over 60 percent of Lonza's market value, and a planned
capital increase of up to 3.3 billion Swiss francs ($3.22 billion),
would be hard to digest.
The share price had already fallen by 5.3 percent on Monday after
Reuters reported Lonza was in advanced talks to buy Capsugel from
private equity firm KKR.
"We like the logic of the deal but think it is not a bargain,"
analysts at Baader Helvea said. "The pending capital raising will
weigh on Lonza's stock."
Lonza has long been seeking to bulk up with an acquisition and
earlier this year was looking at U.S. group Catalent to give it a
wider range of active pharmaceutical ingredients and drug delivery
products but failed to agree on price, sources have said.
Based in Morristown, New Jersey, Capsugel manufactures empty
two-piece hard capsules as well as finished dosage forms for oral or
inhalable drugs to make sure that active ingredients are absorbed by
the body in the right place.

Lonza Chief Executive Richard Ridinger said Capsugel's drug delivery
products - which ensure, for example, that a drug reaches the right
place in the digestive tract - complements Lonza's expertise in
pharma ingredients and contract manufacturing of active compounds.
The drug industry has been working to switch some established
injectable medicines to the more convenient oral route of
administration to boost patient acceptance.
Lonza's industry customers could now order "either the whole menu or
a la carte," the CEO told analysts in a conference call.
"There's nobody on this planet who can offer that."
But some analysts said Lonza could be neglecting the biotech drug
industry, with its focus on large-molecule proteins that are
typically for injection only.
"We are ... surprised to see an acquisition that has synergies with
chemical drug manufacturing rather than biological manufacturing,"
said Carla Baenziger, an analyst at Swiss bank Vontobel.
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Lonza has secured committed debt financing of $6.2 billion from Bank
of America Merrill Lynch and UBS. Jefferies LLC is Lonza's lead
financial adviser, the company said, while Goldman Sachs is sole
financial adviser to Capsugel.
The acquisition of Capsugel, which serves more than 4,000 corporate
customers and employs approximately 3,600 people across 13
facilities on three continents, is expected to be completed in the
second quarter of 2017, subject to regulatory approval and closing
conditions, Lonza added.
Lonza and Capsugel recorded combined revenue of 4.8 billion francs
in 2015 and adjusted earnings of 1.14 billion francs before
interest, tax, depreciation and amortization (EBITDA).
The company said it expected to cut 30 million francs of annual
operating costs by the third year after closing of the deal and
generate 15 million francs in yearly tax savings.
By the fifth year, it expected annual savings of around 100 million
francs.
Lonza said it intended to maintain its current dividend policy and
net debt leverage of roughly three times EBITDA.
(Additional reporting by Patricia Weiss; Editing by Jason Neely,
Greg Mahlich)
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