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Elanco-UM

Elanco restructures following Bayer Animal Health acquisition

Initial actions expected to create at least $100 million in annual savings; Elanco also makes first $100 million term loan repayment.

Elanco Animal Health Inc. announced Sept. 30 its first business restructuring just two months following the closing of its acquisition of Bayer Animal Health.

Elanco said it has also started its de-leveraging process by making a $100 million payment on its term loan.

Company leadership has quickly evaluated the capabilities, structure and staffing of the combined business required to meet its goal of being an "agile, fit-for-purpose global leader dedicated exclusively to animal health," the announcement said.

As part of this effort, Elanco announced its intent to eliminate more than 900 positions across nearly 40 countries, primarily in sales and marketing but also research and development, manufacturing, quality and back-office support.

Elanco said these actions will begin to reduce duplication, drive efficiency and optimize the company’s footprint across geographies, particularly in Basel, Switzerland, which had been a key location for Bayer Animal Health.

The outlined initiatives are the first phase of Elanco’s disciplined process to capture greater value, the announcement said. These efforts build on Elanco’s productivity agenda in its Innovation, Portfolio & Productivity (IPP) Strategy, which has included consolidating suppliers and contract manufacturers.

“The team has rapidly applied our historic integration experience to move with speed and decisiveness and capture initial synergies, even during the continued challenges created by the COVID-19 pandemic,” Elanco president and chief executive officer Jeff Simmons said. “After our early view of the combined business, we have full confidence in delivering $275 million to $300 million in synergies, with the first two-thirds coming in the first 30 months. Today’s actions will reduce duplication and increase efficiency within our global footprint while the team builds longer-term plans around procurement savings, SKU optimization and streamlining manufacturing processes.

"While decisions that affect our employees are always difficult, we remain committed to treating affected employees with our guiding value of respect and following all local consultation processes,” Simmons added.

Elanco noted that the cost of the proposed actions is expected to be between $190 million and $210 million, with approximately $170-190 million in severance and approximately $20 million in asset impairments and other charges. As part of the transaction with Bayer A.G., $35 million was reflected in the purchase price attributable to Elanco’s restructuring costs. Cash severance payments will be distributed over the next two years. Elanco expects to incur a restructuring charge of $130-145 million in the 2020 third quarter and $40-45 million in the fourth quarter. The remaining estimated $20 million will be incurred in 2021. Elanco expects to realize at least $100 million of annual compensation and benefits savings toward the planned synergy goal of $275-300 million.

“We see the deal rationale coming to life as we bring together our long-standing focus on the veterinarian with Bayer’s direct-to-consumer expertise to open new opportunities, particularly given pet owners’ increased desire to access care and products via online, retail, telemedicine and direct-to-the-doorstep channels,” Simmons said. “Our team is focused on making the tough decisions that drive value quickly while enabling our innovation and growth strategies. Most importantly, moving so fast in our commercial areas means we now have a larger, stronger team in place supporting customers to enhance our overall commercial competitiveness. Today’s proposed actions will ultimately better position us to advocate for our customers and to deliver solutions to their greatest unmet needs.”

De-leveraging begins

Elanco reported that it has also started repayment against its loan that funded the Bayer Animal Health acquisition. On Sept. 25, Elanco repaid $100 million of its $4.275 billion Term Loan B.

“With the acquisition closed and working capital needs established, we have sufficient liquidity to begin de-leveraging, thanks to strong cash flow in [the second quarter of] 2020,” said Todd Young, Elanco executive vice president and chief financial officer. “We will continue to repay debt from our operating cash flow in 2021 with a focus on our $500 million note, which is due in August 2021.”

Elanco Animal Health is a global leader in animal health dedicated to innovating and delivering products and services to prevent and treat disease in farm animals and pets, creating value for farmers, pet owners, veterinarians, stakeholders and society as a whole. With nearly 70 years of animal health heritage, it is committed to helping customers improve the health of animals in their care while also making a meaningful impact on local and global communities.

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