Drogasil Deal Could Reach 11x Ebitda

Talk of a possible merger between Brazilian pharmaceutical companies Droga Raia and Drogasil has been growing louder, with some valuing the combined entity at around 11x forward Ebitda. Guilherme Assis, equity analyst with Raymond James, says deals in the sector have been going for around 7-8x Ebitda. However, that benchmark is primarily based on acquisitions done by Brasil Pharmaceuticals, the sector’s most active consolidator, and comes from looking at smaller acquisitions with fewer competitive advantages. Drogasil is perhaps a fairer comparison and it has been trading at around 10.5x forward Ebitda, which Assis sees as fair value, and is now at 11x after a 17% run-up in the company’s stock in recent days. Although Drogasil is the larger entity, analysts say Droga Raia is more likely to be the acquiring entity. “Droga Raia has more ambition,” says Iago Whately, equity analyst with Fator. He says the Pipponzi family, which controls Droga Raia, is unlikely to want to part with its controlling stake in the company. “The family controls and works in the company. They don’t want to leave the business, whereas Drogasil is controlled by an investor.” Drogasil is controlled by Carlos Pires Oliveira Dias, a member of the Camargo Correa family, which does not work in the business and sees the investment as a passive one, adds Assis. Although negotiations are ongoing between the two parties and no structure has been decided on yet, analysts say a deal is likely to consist of a share swap rather than a cash offer. “They have to keep the expansion plan. They cannot afford to lose a year or two of growing potential,” says Whately. Furthermore Drogasil may be reluctant to increase debt levels after recently reducing leverage ratios to a comfortable level. “Now that they have the cash, I don’t think they’re willing to lever up again just to do the deal. A share swap is more likely,” Assis says. The combined entity would control around 10% of the pharmaceutical market, putting it