The IPO market has been showing signs of life in 2004, but the renewed vim doesn’t necessarily mean there’s a clear path to going public. Despite nearly two years of sustained effort, Merck KGaA finally put aside its desire to spinout its VWR International laboratory division, instead selling the business to Clayton Dubilier & Rice in a deal valued at $1.68 billion (EURO1.34 billion). The transaction is expected to close in March or early April.
“We have been in conversations with Merck, on and off, for probably three years, now,” CD&R Partner Rick Schnall said. “We approached them again this past October. They had been trying to take the business public for the prior 18 months, and because of market conditions and the business’ performance, our interest led to their hiring Bear Stearns to sell the company.”
VWR can trace its roots back to the gold rush, when founder John Taylor launched a druggist and chemical glassware company that catered to California’s miners. Nearly a century and a half later, Merck grabbed a 15% stake in the business in 1995 and acquired the balance in 1999. VWR, now based in West Chester, Pa., distributes over 750,000 different products, from portable pipette holders to fully equipped laboratory clean rooms, and the company generates annual sales of around EURO2.4 billion.
In winning the auction, sources said CD&R had to go up against Kohlberg Kravis Roberts & Co., among other high-profile financial sponsors. To finance the deal, the firm has tapped Deutsche Bank, Citibank and Bank of America to provide a combination of bank debt and high-yield financing, which will comprise over $1 billion of the purchase price. CD&R will cover the rest with equity from its $3.5 billion Clayton Dubilier & Rice Fund VI. As part of the deal, Merck has agreed to maintain a long-term distribution agreement with the business.
Metzler Equity Research, a German investment bank, said, “The VWR divestment was another positive announcement by Merck…as [a] price of above EURO1.3 billion was at the upper end of the expectation range.”
However, Schnall said, “There’s a significant amount of cash in the business, so you have to look at it as purchase price net of cash. We’re comfortable with our ability to create value here… Top line revenue growth-organic and through acquisition-and operating margin improvement are both doable in the next few years. And if you look at the price as a multiple, compared to competitors such as Cardinal [Health], AmerisourceBergen and Fisher [Scientific International], they all trade in excess of 10 times, so we feel it’s a discount to that.”
Plus, CD&R is familiar with the distribution industry, and the firm believes VWR’s end markets should continue to show strong growth, and match the 4% to 6% annual expansion the markets have generally recorded. “The end market growth is one of the keys here,” Schnall said. “It’s being driven by the increases in research spending in both the pharmaceutical and education markets, and government spending, on homeland defense, is another big growth opportunity for this business.”
In looking for an exit, CD&R will most likely pursue an IPO. Given the current valuations similar companies are trading at, CD&R expects that route to provide an opportunity for VWR in the next three years or so. Additionally, according to the terms of the deal, CD&R would need Merck’s consent before selling the business to the company’s direct competitors, although once public, that stipulation would be voided.
Following this transaction, CD&R’s Fund VI has roughly $700 million left of its $3.5 billion in committed capital. The firm expects to begin fund raising sometime in the next year, and while a target has yet to be established, it is anticipated the total will be close to its current fund.