Elanco Animal Health Inc. announced Aug. 20 that it has entered into an agreement with Bayer AG to acquire its animal health business in a transaction valued at $7.6 billion.
The transaction, which is subject to regulatory approval and other customary closing conditions, creates the second-largest animal health leader while strengthening and accelerating the company’s "Innovation, Portfolio & Productivity" (IPP) strategy.
According to Elanco, the transaction will double its Companion Animal business, advancing the company’s intentional portfolio mix transformation and creating a balance between its Food Animal and Companion Animal segments. Elanco expects the combined organization to continue to deliver mid-single-digit revenue growth while accelerating achievement of adjusted gross margin goals and delivering double-digit adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margin growth.
“In our first four quarters as an independent company, we have validated the significant value creation potential from a dedicated focus on animal health and a targeted strategy,” said Jeffrey N. Simmons, president and chief executive officer of Elanco. “Joining Elanco and Bayer Animal Health strengthens and accelerates our IPP strategy, transforms our portfolio with the addition of well-known pet brands, brings an increased presence in key emerging markets, expands innovation and accelerates our margin expansion journey. The move combines our long-standing focus on the veterinarian while meeting pet owners’ changing expectation of pet care and access to products.”
Bayer AG chief executive officer Werner Baumann added, “Our Animal Health business is among the pioneers of this sector, having built up an attractive portfolio and secured well-established market positions in the companion and farm animal segments, and now, the combination with Elanco will give rise to a leading competitor in the animal health industry, benefiting customers, employees and shareholders alike.”
Elanco said the addition of Bayer Animal Health enhances all major drivers of its IPP strategy, including:
- Portfolio -- Adding Bayer Animal Health’s business accelerates Elanco’s portfolio transformation by elevating Companion Animal to nearly half of the overall business. The combination creates access to new segments of the parasiticides market with topical treatments and collars and propels Elanco into expanding pet e-commerce and retail spaces. This complements Elanco’s already strong veterinary presence, enabling the company to reach more pet owners. In the Food Animal business, the acquisition will add a number of anchor cattle brands, create a bio-protection portfolio and expand Elanco’s aquaculture presence into warm-water fish. The enhanced global presence will allow Elanco to better serve veterinarians, farmers and pet owners.
- Innovation -- The transaction augments Elanco’s already strong research and development (R&D) pipeline with eight significant new development projects and 30-plus life-cycle products while providing certain access rights to Bayer’s CropScience R&D pipeline and de-prioritized clinical pharma assets. It adds capabilities for R&D platforms in key areas, along with innovative dosing and delivery technology platforms. The acquisition also adds further bench strength and scale to Elanco’s world-class R&D team.
- Productivity -- The combination of Bayer and Elanco accelerates Elanco’s margin expansion opportunity and delivers adjusted earnings per share accretion in the first full year post-closing and then high single to low double-digit percentage accretion in year two. The acquisition also unlocks Elanco’s ability to achieve 60% adjusted gross margin and 31% adjusted EBITDA margin faster than on a stand-alone basis, with the increased ability to improve beyond. It brings operating cash flow of approximately $1 billion annually by the third year post-closing, allowing Elanco to reach 3x gross debt to adjusted EBITDA in the same time period, along with the potential for $275-300 million in synergies. Finally, Elanco will bring together two complementary dedicated animal health businesses to operate on one fit-for-future infrastructure.
“This combination will join two complementary animal health-focused entities previously under the human pharma umbrella into a dedicated company focused on delivering for farmers, veterinarians and pet owners. It creates increased speed, attention and investment to bring customers greater access and options at a variety of price points to make a difference in the lives of animals,” Simmons said. “We look forward to adding Bayer Animal Health’s employees’ breadth of expertise. Ultimately, we believe these increased capabilities and knowledge will allow us to better support the veterinarian, creating a bridge between the pet owner and the veterinarian where relationships don’t exist today.”
According to Bayer, the exit of the Animal Health business marks the largest transaction in the series of portfolio measures initiated by Bayer in November 2018. The company had previously announced the divestiture of its Consumer Health brands Coppertone and Dr. Scholl’s, along with the sale of its 60% stake in German site services provider Currenta.
Bayer’s Animal Health business is a global leader in the segment, with sales of $1.8 billion in fiscal 2018. It develops and markets innovative products and solutions to prevent and treat diseases in companion and farm animals. The Advantage family of flea, tick and worm control products, for instance, has been among the most successful products on the market for years. In addition, the Seresto collar is one of the fastest-growing products in this area.
“We would like to thank all our Animal Health employees for the commitment they have shown over the years and for the success this has brought to Bayer and to our Animal Health business. We were also able to safeguard the interests of our employees,” Baumann said. Under the agreement with Elanco, all Bayer Animal Health employees will have at least one year of employment protection against unilateral termination with similar and no less favorable benefits in the aggregate.
Key terms and financing
Elanco said it will finance the transaction through both cash and equity. Bayer AG will receive $5.32 billion in cash, subject to customary purchase price adjustments, and $2.28 billion, or approximately 68 million Elanco Animal Health common shares. This represents a 70%-to-30% cash-to-equity mix.
The transaction is expected to close in mid-2020, subject to regulatory approvals and other customary closing conditions.
Goldman Sachs acted as financial advisor to Elanco, and Paul, Weiss, Rifkind, Wharton & Garrison LLP and Hengeler Mueller acted as legal counsel to Elanco. Elanco’s board of directors was provided with a fairness opinion by Duff & Phelps.
Bank of America Merrill Lynch and Credit Suisse acted as financial advisors to Bayer, while Sullivan & Cromwell, PwC Legal and Linklaters acted as legal advisors.
Elanco is a global animal health company that develops products and knowledge services to prevent and treat disease in food animals and pets in more than 90 countries. With a 65-year heritage, Elanco rigorously innovates to improve the health of animals and benefit customers while fostering an inclusive, cause-driven culture for more than 5,800 employees.
Bayer is a global enterprise with core competencies in the life science fields of health care and nutrition. Its products and services are designed to benefit people by supporting efforts to overcome the major challenges presented by a growing and aging global population. At the same time, the group aims to increase its earning power and create value through innovation and growth. In fiscal 2018, the group employed around 117,000 people and had sales of 39.6 billion euros.