Shionogi taking 24% stake in C&O Pharm (DMG)

The news: Japanese pharmaceutical group Shionogi & Co is acquiring a 24.17% stake in Chinabased C&O Pharmaceutical Technology for about $80.2m, having entered into an agreement with C&O's largest shareholder Leo Star Development and C&O's executive director Gao Bin. After the share purchase, Shionogi, Gao Bin (through Leo Star) and Sumitomo will thus own 58.17%. Once the transaction has been completed - and assuming certain conditions are met - Shionogi will make a general offer at $0.50 per share for a 41.83% stake worth a total of about $139m, with the intention of making C&O its subsidiary. The combined value of the share purchase and the general offer is expected to total about $219m. At $0.50 per share, the offer price represents a premium of 11.1% to the last traded price of $0.45 on the SGX on July 28, which is the last full day of trading prior to the announcement.

Our thoughts: One of the reasons cited for the acquisition is that Shionogi believes there is a strategic fit between both companies given its R&D capabilities and C&O’s established nationwide pharmaceutical distribution network in China, as well as C&O’s experience in developing pharmaceutical products and dealing with the relevant authorities in China. In addition, Shionogi believes that acquisition will facilitate its foray into new markets in China.

In our S-Chips sector update dated 19 July 11, we note that one of the key factors for M&A include dominant market share and extensive distribution network in China, as observed from recent proposed Nestle-HsuFuChi transaction. Other than C&O, we have also highlighted that China Animal Healthcare (CAL SP, BUY, TP S$0.42) has a difficult-to-replicate direct sales model that allows the company to achieve above 75% gross profit margin by selling directly to ~5,400 end retailers, 32 large poultry corporations and government agencies (for compulsory vaccines), without the use of provincial wholesalers and distributors. S-Chips that command substantial market share in their respective fields include China Aviation Oil (CAO SP, UNRATED), HL Asia (HLA SP, BUY, TP S$2.98), MIDAS (MIDAS SP, BUY, TP S$0.73) and Sunvic Chemical (SVC SP, UNRATED).

Other companies with competitive edge would also include Yangzijiang (YZJ SP, BUY, TP S$1.98) that accounts for ~3% of China’s shipbuilding output and Fuxing China (FUXC SP, BUY, TP S$0.255), a PRC zipper maker with 4% domestic market share. In terms of those with consumer brand equity, it will include Dukang Distillers (DKNG SP, UNRATED) and Synear Food (SYNF SP, UNRATED).