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Following on from the AltX-listed medical devices group's recent series of news items centering on a forced takeover offer to minorities by Blackstar (amongst others), Myriad today announced a significant acquisition of a 51% interest in Litha Healthcare Holdings for approximately R114 million. The 51% stake comes with a call option to acquire the rest of the equity and Litha's shareholders have a put option to sell the remaining stake to Myriad. The call option expires at the end of 2010 and the put option expires at the end of 2011, with both options excersisable at a Price Earnings of 7.2 times the average profit for the average of the preceding two years worth of Litha's net profit. What is interesting is both the size and the valuation of Myriad's acquisition of Litha. The medical devices group's market cap is currently at R156 million, which shows the true size of the acquisition of R114 million for 51% of Litha and implies that Litha, as a business, is around one and half times the size of MYD... Hence Myriad's intention to change its name to "Litha Healthcare Group" (as well as the group's intentions to move to the Main Board) after the transaction.Not only that, but the Litha acquisition is being valued at an earnings multiple of 7.2 verus MYD's one of 6.83... Normally the listed company gets a liquidity premium, even in the cases when the acquiree is larger than the acquiror. On this point, this does not appear to a reverse acquisition, because the majority of the 51% equity being acquired by MYD is being paid with by cash (that will be funded by a Blackstar-underwritten rights offer at 80c). While a number of MYD shares will be issued to fund the acquisition, it leaves the former Litha shareholders with only an about 20% stake in the business (post-rights offer holding drops to around 13%, assuming they take up no rights shares). As I said above, the cash component of this acquisition will be funded by the (currently fashionable) underwritten rights offer at a price of 80c per share with 79,16 rights offer shares. Blackstar is underwriting the rights offer aiming to raise a total of R100 million. Most intruiging in the acquisition is that it fundamentally changes Myriad's product mix. Litha is a diversified healthcare group focussing on biotechnology, pharmaceuticals and consumables with an investment arm holding strategic interests in healthcare businesses. The SENS goes on to explain Litha's business in more detail by saying: "The group imports and distributes paediatric and adult vaccines under agency for several major international pharmaceutical companies (including Sanofi Pasteur, Pfizer, Novartis Vaccines, Heber Biotech, Statens Serum Institut and GSK)and is the exclusive supplier of paediatric vaccines to the South African Government through The Biovac Institute (a Public Private Partnership) controlled by Litha. The Biovac Institute is in the process of developing the capacity to manufacture vaccines under license in the near future. Distribution for the group is handled internally through Litha Medical Logistics (a specialised cold chain distribution and logistics business. Certain minority interests that are deemed to be non-core will be exited in an appropriate manner. Pharmaceuticals and generics will be a major focus of Litha going forward and in this regard they have secured South African licenses for a number of new products that are currently at the Medical Control Council awaiting registration. In addition Litha has an option to acquire 74% of the shares (being the shares that they do not already own) in Pharmafrica (Pty) Ltd, a branded pharmaceutical business. In all likelihood this option will be exercised in the near future, further strengthening Litha`s pharmaceuticals and generics business." Myriad's business has always focussed on medical devices, but Litha's addition now expands the group to medicines too. Given Aspen and Cipla Medpro's high earnings multiples versus Myriad's one, perhaps this is a reason for the higher than market earnings multiple of the acquisition. I.e. an upwards earnings multiple rerating is being factored in. Given Blackstar's Board representation's temporary nature, its quite interesting how part of the deal sees Litha putting their own CEO and CFO in place. The SENS goes on to say: "Selwyn Kahanovitz and Martin Kahanovitz will take over as CEO and CFO of Myriad respectively. Dr Morena Makhoana will become the deputy CEO of the enlarged group. Selwyn will however still remain at the helm of The Biovac Institute as CEO. He brings more than 28 years of experience in the medical and pharmaceutical industry as an entrepreneur. As Litha`s CFO, Martin brings 13 years financial experience to the Group. Morena has been an executive of Litha and The Biovac Institute and has more than 8 years experience in the healthcare industry. The operational management of Myriad`s existing businesses will be unchanged by the transaction and Barry Budler (Myriad`s current financial director) will be responsible for the group`s devices and medical consumables business." The MYD share price reacted extremely positively to this announcement and closed up 12.20% at 92c (which is importantly above the forced takeover offer of 80c). This could well be the acquisition that brings the critical mass to Myriad that the investment public has been waiting for. While I have supported the business for a while, I find myself extremely positive about a deal that adds depth and breadth to both products lines, management and shareholder structure (with Blackstar potentially increasing its own stake by a significant amount).
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