Durham-based Patheon is merging and being taken private in $2.6 billion deal

dranii@newsobserver.comNovember 19, 2013 

Durham-based pharmaceutical services company Patheon is going private and entering into a merger that will create a significantly larger business under a complex three-way deal valued at $2.6 billion.

The new company that results, which hasn’t been named, is expected to have annual sales of about $2 billion next year and will be headquartered in Durham. Patheon CEO Jim Mullen will head the combined business, which will have 8,300 employees.

Mullen said in a phone interview that the deal will vault the combined business into the top three contract manufacturing companies in the pharmaceutical sector and will enable it to offer one-stop shopping.

The industry is undergoing a wave of consolidation, Mullen added, because drug companies are interested in outsourcing more production but at the same time want to simplify their supply network.

“For us, it is how do you grow the business faster and get more efficient quickly,” he said.

The deal, announced Tuesday, calls for Patheon shareholders to receive $9.32 per share, or a 64 percent premium compared with Monday’s close. That values the business at about $1.4 billion.

Patheon shares closed Tuesday at $9.37, up $3.64.

JLL Partners, the New York-based private equity firm that owns a controlling stake in Patheon, is spearheading the deal along with Royal DSM, a vitamin company based in the Netherlands whose pharmaceutical products business will be rolled into the combined company. JLL will own 51 percent of the new business, and Royal DSM will own 49 percent.

“We see a good strategic rationale for the partnership, while the deal seems financially sound,” Filip de Pauw, an analyst at ING, told Bloomberg News.

Patheon manufactures drugs for pharmaceutical companies and also provides services, such as developing formulations of experimental medicines. It also acquired some products of its own last year when it paid $255 million for High Point-based Banner Pharmacaps.

Patheon posted a 30 percent jump in revenue in the latest quarter and anticipates revenue for its fiscal year will exceed $1 billion. It has 5,900 employees, including 70 in Durham.

Royal DSM’s pharmaceutical products business, which is headquartered in Parsippany, N.J., has about 2,400 employees and generated sales of about $733 million last year.

Mullen said Patheon lacks the ability to manufacture active pharmaceutical ingredients that go into drugs, which is a piece of the drug supply chain that Royal DSM brings to the table. Royal DSM also makes biological drugs produced from living organisms.

Mullen said that the combined company’s headquarters and back office operations will be based in Durham and that executives from both companies will be included in the senior management team.

The deal, which is expected to be completed in about three months, will trigger an undetermined number of layoffs.

“Inevitably, when you put two large organizations together, there are some overlapping things” among administrative staff, Mullen said.

But, he added, “I don’t think we’re going to be talking about much of anything in North Carolina.” He also said that the combined business will include a manufacturing plant in Greenville that “has tremendous potential to have expanded business from where it is today.”

The deal to take Patheon private must be approved by shareholders. The company received “fairness opinions” on the offer from BMO Capital Markets and RBC Capital Markets.

JLL would receive the same per-share price as other shareholders under the deal. It also is contributing $489 million in cash to the new business.

The deal is being financed by $1.65 billion from J.P. Morgan, UBS, Jefferies, Morgan Stanley and KeyBank.

Mullen said the combined business will continue to be a player in the consolidation trend.

“We do think we will do more acquisitions along the way,” he said.

Ranii: 919-829-4877

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