Elanco Announces Sale of Aqua Business for $1.3 Billion
- Sale of aqua business to Merck Animal Health for $1.3 billion in cash
- Focus on pet health and livestock sustainability
- Accelerated debt paydown by $1.05B to $1.1B
- Expected net debt to adjusted EBITDA in the high-3x to low-4x range by the end of 2025
- None.
Insights
The sale of Elanco's aqua business to Merck Animal Health represents a strategic divestiture aimed at streamlining the company's focus on higher-growth sectors. The valuation of the deal at 7.4x the estimated 2023 revenue indicates a premium against the backdrop of the animal health industry multiples, which often hover around 4x to 6x sales for similar transactions. The proceeds will significantly accelerate Elanco's deleveraging plans, which is a positive signal to creditors and investors concerned with the company's financial health.
The planned debt reduction is expected to lower the net debt to adjusted EBITDA ratio, improving Elanco's leverage metrics. This financial restructuring could lead to a re-rating of Elanco's creditworthiness and potentially lower borrowing costs in the future. The reduction in interest expense by approximately $65 million annually will enhance earnings per share, albeit the transaction is projected to cause a net EPS dilution of $0.03 in the short term. Investors should weigh the immediate dilution against the long-term benefits of a stronger balance sheet and focus on core growth areas.
Elanco's decision to prioritize investment in pet health and livestock sustainability aligns with market trends, where pet health in particular has seen robust growth due to increased pet ownership and spending on animal care. The divestiture allows Elanco to concentrate resources on segments with higher barriers to entry and innovation potential, such as the development of next-generation pet parasiticides and livestock sustainability products.
The mention of six potential blockbuster products in the U.S. market by 2025 signals a strong pipeline that could drive significant revenue growth. This strategic focus on innovation and high-margin areas is likely to resonate well with investors looking for growth opportunities within the animal health sector. The market will be watching closely for the U.S. approvals of products like Credelio Quattro™, Zenrelia™ and Bovaer®, which could be key drivers of Elanco's future performance.
The transaction's legal intricacies involve the transfer of manufacturing sites in Canada and Vietnam, as well as approximately 280 employees, which will require careful navigation of local labor laws and regulations governing international asset transfers. The successful integration of these assets by Merck Animal Health will be crucial to realize the expected synergies and market leadership in aqua health.
Moreover, the deal structure as a cash transaction provides Elanco with immediate liquidity, which is beneficial for rapid debt reduction. However, it is important to monitor post-closing obligations and any contingent liabilities that may arise. Both parties will need to ensure regulatory compliance, particularly in obtaining necessary approvals and managing the transition of the aqua business without disrupting ongoing operations.
Transaction reinforces Elanco's commitment to most significant value creation opportunities in pet health and livestock sustainability
Enables company to accelerate debt paydown by
"A strategic decision resulting from a disciplined process over the last year, the sale of the aqua business allows us to prioritize our investments in larger markets with greater earnings potential over the medium and long term, while creating balance sheet flexibility," said Jeff Simmons, President and CEO of Elanco Animal Health. "We are focused on delivering consistent high impact innovation and continue to have confidence in our late-stage pipeline with six potential blockbuster products expected in the U.S. market by 2025. Further, we are advancing our next wave of development projects, which we believe will contribute meaningful growth for Elanco through the second half of the decade. Importantly, the proceeds from this transaction combined with improved free cash flow from the business, will accelerate deleveraging with net debt to adjusted EBITDA expected in the high-3x to low-4x range by the end of 2025."
The transaction reinforces Elanco's focus and investment on its most significant value creation opportunities, notably in pet health and livestock sustainability. In addition to the expected
"We are excited for the acquisition of Elanco's aqua products, solutions as well as the capabilities and expertise the team brings to our business," said Rick DeLuca, president, Merck Animal Health. "We believe this acquisition, coupled with our commercial and scientific prowess, will deliver enhanced benefits for our aqua customers. The addition of this innovative portfolio of cold water and warm water aqua products across vaccines, anti-parasitic treatments, water supplements and nutrition, will establish Merck Animal Health as a leader in aqua."
Transaction Details
Elanco's aqua business includes products across both warm-water and cold-water species, generating an estimated
Upon closing of the transaction, Elanco plans to use the expected
The expected retirement of a portion of the Term Loan B debt will result in reduced interest expense of approximately
The transaction, which is subject to regulatory approvals and customary closing conditions and adjustments, is expected to close around mid-year. The Company plans to discuss the transaction further when it releases its fourth quarter and full year fiscal 2023 financial results on February 26th, 2024.
BofA Securities, Inc. is serving as the company's exclusive financial advisor and White & Case LLP is serving as the company's legal advisor in connection with the transaction.
Preliminary Full Year 2023 Results
This press release discusses estimated financial results for the full year of 2023, which are preliminary, unaudited and represent the most recent current information available to company management. The company's actual results may differ from these estimated financial results, including due to the completion of its financial closing procedures and final adjustments. The company expects to issue full financial results for the fourth quarter and full year 2023 on February 26, 2024.
About Elanco
Elanco Animal Health Incorporated (NYSE: ELAN) 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, we are committed to helping our customers improve the health of animals in their care, while also making a meaningful impact on our local and global communities. At Elanco, we are driven by our vision of Food and Companionship Enriching Life and our Elanco Healthy Purpose™ Sustainability Initiatives – all to advance the health of animals, people, and the planet. Learn more at elanco.com.
Cautionary Statement Regarding Forward-Looking Statements
This press release contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, without limitation, statements regarding the proposed divestiture, including the timing of the divestiture, the expected financial impacts of the divestiture, plans for using the cash we expect to receive in the divestiture, the impact of the divestiture on our business and financial results, expected growth in our business and expected product launches and sales. There are a number of important factors that could cause actual events to differ materially from those suggested or indicated by such forward-looking statements, including uncertainties as to the timing of the divestiture; the inability of the parties to satisfy the conditions to closing the divestiture, including obtaining required regulatory approvals; the effect of the announcement or pendency of the transaction on Elanco's ability to retain and hire key personnel and maintain relationships with customers, suppliers and other business partners; risks related to diverting management's attention from our ongoing business operations; our ability to recognize the expected financial and cash generation benefits of the transaction; the impact of disruptive innovations and advances in veterinary medical practices, animal health technologies and alternatives to animal-derived protein; changes in regulatory restrictions on the use of antibiotics in farm animals; the success of our research and development and licensing efforts; unanticipated safety, quality of efficacy concerns and the impact of identified concerns associated with our products; the lack of availability or significant increases in the cost of raw materials; risks related to the evaluation of animals; manufacturing problems and capacity imbalances; and actions by regulatory bodies, including as a result of their interpretation of studies on product safety. For information about other factors that could cause actual results to differ materially from forward-looking statements, please see the company's latest Form 10-K and Form 10-Qs filed with the Securities and Exchange Commission. Although we have attempted to identify important risk factors, there may be other risk factors not presently known to us or that we presently believe are not material that could cause actual results and developments to differ materially from those made in or suggested by the forward-looking statements contained in this press release. We caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included elsewhere in this press release. Any forward-looking statement made by us in this press release speaks only as of the date thereof. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or to revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
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SOURCE Elanco Animal Health
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