Abcam Stock: Higher Limited Upside With Possible Acquisition (NASDAQ:ABCM)

investment report

Abcam plc (NASDAQ:Nasdaq:ABCM) has received a tremendous offer these past two months after announcing a “strategic review,” and acquisition interest from Danaher (DHR) now looks increasingly likely.

ABCM appeared authoritatively in June after the British The company confirmed it will consider a sale to the right target after a proxy battle with founder Jonathan Miller and activist hedge fund Starboard Value. opened a position in the company in June. Miller taken out of his proxy request in June as well. The impact of these “events” can be seen in Figure 1, which seem to have changed the expectations of the company in the future.

Here I will cover all the moving parts of the potential sale to DHR as far as is known, keeping in mind that a deal could be confirmed as soon as the week beginning the 28th. August 2023, as reported by the company. Net-net, without the full details of the deal being known, it’s hard to recommend a buy at ABCM, especially since there has been no confirmation. Avid readers will know that I have been flat on ABCM since Februaryhighlighting the many value compressors and inability to capture a bid from its all-time lows since its listing on the NASDAQ in 2020. On that note, I continue to rate ABCM a hold, pending 1) a buy being confirmed first. and 2) full details of any potential acquisitions.

Figure 1. Multiple turning points push ABCM’s ADRs away from lows

Figure 2. ABCM sells off at all-time highs after a series of investment updates

recent developments

1. DHR acquisition interest

ABCM is now firmly in the crosshairs of the deal and DHR is emerging as the favorite to acquire the company. The reports emerged yesterday after people familiar with the matter told the media that DHR had outbid competing bidder Agilent Technologies (A) in the race to take over ABCM’s operations.

As background, DHR has been expanding its biomedical footprint for some time. As a serial acquirer, you are not far behind when it comes to spending big on strategic transactions to expand your own portfolio. It acquired Cytiva in 2020 for $21 billion and has a long list of multi-billion dollar acquisitions over the past decade. Figure 3 schematics this story in greater detail.

Figure 3.

A few months passed, and ABCM’s board of directors unanimously decided to explore “strategic alternatives” for the future of the company. Among those options, a possible sale of the company was immediately launched into the foray.

The move came amid ABCM’s engagement in a proxy battle between company founder and former director Jonathan Milner, who also owns a 6.3% stake in the biotech player. At the time, Milner aspired to seek a position on the board of directors as CEO of the company he founded. ABCM said it was “disappointed that despite clear and consistent efforts by the Board to engage constructively with [Milner]he…followed aggressive tactics while [sought] force the company to accept their demands”. Interestingly, the company appears to have acted in part, given that Milner withdrew the representation request at the end of June, saying he wanted to “Allow the board to focus on conducting its strategic review.”

While this is potentially positive news for the company, it is critical to note that:

1. Neither ABCM nor DHR have confirmed the deal yet; the reports come from sources “familiar with the matter.”
2. If confirmed, the precise details of the proposed price remain undisclosed.

The suggestion is that the offer could mimic ABCM’s current market capitalization, around $5.2 billion at the time of writing. This estimate is influenced by the fact that the company’s shares have already achieved a 20% rally since mid-July after the company revealed that it was considering acquisition interests.

2. Forensic analysis of possible acquisitions

It is worth noting several points about a possible acquisition. As a scenario, I’m assuming the transaction price will be set at $5.2 billion, the company’s market capitalization at the time of writing. In terms of comparable biotech M&A deals to date, this one ranks at the higher end of the scale. Figure 4 shows that it would be in line with Astellas Pharma’s (OTCPK:ALPMF) purchase of Iveric Bio (ISEE) for $5.9bn (see my August ALMPF post covering this here). Merck’s (MRK) purchase of Prometheus Biosciences for $10.8 billion leads the transaction value in this comparative analysis.

Figure 4.

The market is certainly on board with the prospect of a strategic acquisition of ABCM. Figure 5 illustrates the money flows in and out of ABCM’s US-listed shares during 2023. Statements since June have clearly sparked a wave of demand for the shares. Investors are net long (interest short 0.43%) and capital inflows are the highest between June and August since the start of fiscal 2023. Assuming the market is an accurate judge of value and expectations, this chart reveals both for ABCM.

Figure 5.

The next question I would ask myself is “Why is DHR interested in ABCM in the first place?”. The return on its capital has been stable and, as discussed in the last post, so has the earnings generated by the capital invested in the business.

But they don’t pay us for what’s already happened. It is expectations – or even as I once saw it, “expectations of expectations” – that drive market returns over the medium term. Likewise, in my opinion, the future expectations of ABCM are a valuable thing. The company reported in July that it expects 525 million dollars in sales for the fiscal year 23 the adj. EBITDA margins of 46% (all figures are converted to USD at the rate of USD 1 = GBP 0.79).

Figure 6 shows ABCM’s annual revenue growth and EBITDA margin from 2015 to 2023 estimates. Assume you’re presenting the forecasted numbers for this year, what you’re seeing is 27% growth in gross revenue and a growth of 26 percentage points. in EBITDA margin (leading to an EBITDA of $241.5mm). Perhaps this is one of the reasons behind the agreement.

The capital put at risk in the business (around $1.01 billion deployed at the time of writing) could be considered quite valuable considering these figures. Assume a $1.1 billion growth in deployed capital (with WC considerations), what we’re looking at is $1.1 billion will produce $188.5 million in pre-tax earnings; otherwise, a pre-tax return on investment of 18.8%. In per share terms, you are looking at $4.80/share of equity which produces $0.82/share in pre-tax earnings. Compared to the ABCM story, this is a big step forward.

Figure 6.

Is the deal with an estimated transaction value of $5.2 billion worth it? Figure 7 looks at some basic assumptions given the company’s latest book values ​​to see how “brave” it would be for DHR in terms of valuation. Again, I would like to stress that this is being done on the assumption of a $5.2 billion offer and that a deal is being finalized first. I have also included the value of intangible assets as part of ABCM’s “adjusted” liquidation value, since they have value. They include patents, trade names, license rights, etc. ABCM’s net asset value is $3.84 per share based on its latest reported book values, net of ~$400 million in liabilities. With a market capitalization of 5.2 billion dollars, we are looking at a premium of 6.1 times the adjustment. liquidation value and ~21.5 times FY23 EBITDA estimates. ABCM is currently selling at 36.7 times forward EBITDA as I write, so this would be a steep discount to current market value.

Figure 7.

Discussion

Biotech M&A hasn’t slowed down in 2023 despite a higher cost of capital and a dearth of money within funding circles. Let’s consider the scenario that DHR has indeed decided to sideline ABCM for a second, and could potentially pay around current market value. DHR’s extensive acquisition history is worth noting. But it hasn’t exactly outperformed equity benchmarks in the last two years either, having dipped from all-time highs of ~$330 in August 2021. It is now trading at ~$255 as I write. If you put the pandemic era aside, the HR Department was an all-powerful factor. From 2013 to 2019, it rated 285% up, from $41 to $158 in a matter of 6 years, all fueled by its buy-growth strategy. If history really does rhyme, as Mark Twain opined, then one would expect the DHR to accept another offer in the next decade.

ABCM, on the other hand, would be a great benefactor of an acquisition. Its capital struggled since it was listed on the NASDAQ in 2020 and after it was delisted from the LSE. Crucially, the acquisition would expand DHR’s footprint in the biomedical arena while providing much-needed capital resources and potential synergies for ABCM. The question is what it means for shareholders. Not much, in my opinion. Given ABCM’s rally from the June lows, it remains to be seen at what level it can sell from here. In my opinion, DHR is unlikely to offer a substantial premium over these current levels, for the same reason. Unfortunately, at the moment it is difficult to surround the capital of ABCM, in the hope of attacking with the investment fangs a premium offer. In that sense, I still rate ABCM as a hold.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Be aware of the risks associated with these stocks.