2023-06-30 17:07:45 ET
Summary
- Syneos Health received an acquisition offer from a PE consortium of c.$7.1 billion.
- The transaction involves an all-cash consideration of $43.00 per share, a 1.7% premium over SYNH's stock price at the time of the offer.
- Shareholders are yet to vote and will have their say on August 2nd, a key date to watch out for to see if shareholders approve.
- Net-net, rate hold.
Investment Summary
Following my February publication on the company, the investment woes for Syneos Health, Inc ( SYNH ) shareholders were absolved last month with a saving grace made from a consortium of private equity ("PE") investors.
After months of speculation , acquisition rumours were confirmed last month when SYNH advised it would be acquired by the consortium, made up from 3 PE giants. However, the buyers did surprise some, and the impending acquisition comes after SYNH made t he objective in February to put itself up for sale. It's important to note the transaction has not yet been finalized, and it still has to be put to shareholder vote. A special meeting will be held on 2nd August in order to catch the vote and determine the company's next moves. Hence, there is scope that either 1) a higher bid may enter, 2) shareholders may vote no, or 3) regulatory intervention. Neither seems overwhelmingly likely, but must be considered anyway until we have the final vote in hand.
Notably, the market has still got SYNH priced at a discount to the offer value, and there's scope for various active strategies to make entrance prior to any confirmation.
This report will cover all of the moving parts involved in the transaction, with my own investment opinions along the way, for the benefit of investor reasoning. You can read the proxy details of the impeding special meeting and upcoming vote by clicking here. With respect to a rating, I am opting to place SYNH a hold on the premise of 1) limited potential upside beyond the potential acquisition price, 2) the fact there are more selective opportunities to position investor capital elsewhere. Here I'll lay out my expectations on the company moving forward, and opinions on the deal. Net-net, rate hold.
Figure 1. SYNH long-term price action
Overview of transactional facts
It is important to understand the salient points covering the transaction. SYNH made the sale announcement last month, confirming the group of PE investors who make up the consortium. As mentioned, this comes at a good time for the firm, given the difficulties in market value shown across FY'22 to date. The firm booked $1.36Bn in turnover in Q1, a small gain on last year, bringing its total asset base to $8Bn.
Prior to the offer, investors appeared to be valuing SYNH on a combination of earnings power and asset factors, as seen below. In particular, as both asset growth and pre-tax earnings rolled over in FY'22, there was little chance in seeing SYNH trade higher without the announcement in my opinion. Hence, in the scenario when the deal does not actually pull through, you would want to be paying very close attention to these numbers. A detailed analysis of the transaction follows.
Figure 2.
1. The consortium
This consortium comprises Elliott Investment Management, Patient Square Capital, and Veritas Capital. Each are renowned entities in the PE landscape. The transaction involves an all-cash consideration of $43.00 per share, culminating in a total deal value of approximately $7.1Bn, including outstanding debt. As a reminder, SYNH's market value is $4.37Bn, with $2.89Bn in debt and $116mm in cash, bringing the enterprise value to $7.14Bn. Essentially, the company is trading at 10x forward EBITDA, which could represent good value for the consortium, in my view.
Elliott's Senior Portfolio Manager, Marc Steinberg, admired SYNH's prominence in "serving large pharma and biotech customers globally, across both clinical development and commercialization". This explains one rationale behind the offer.
With respect to the firm's themselves, Elliott is a very well-seasoned investment manager. It oversees a portfolio of assets totalling $55.2Bn as of December last year. Its history dates back to 1977, when it was formed, thus making it one of the longest-serving managers around. Veritas Capital, on the other hand, specializes in technology investments and commands a formidable $40Bn asset base. Its primary focus is on companies operating at the nexus of technology. Completing the triumvirate, is Patient Square Capital, a specialist healthcare investment firm.
The backing of these 3 PE giants is definitely a positive for SYNH shareholders, who now collect a $7Bn paycheck from the sale (on aggregate).
2. Deal particulars
At $43 per share, the purchase price is a 24% premium over SYNH's stock price at the close on February 13 --when speculation of an SYNH acquisition first surfaced-- and a 2.6% premium to the SYNH share price on May 10, the day the offer was made. The transaction is expected to close in H2 FY'23.
Notably, the deal is still yet to be approved by shareholders, with the special meeting scheduled for August 2, 2023 . Alas, this will be a key date to keep on top of, and if there's any rebuttal from the shareholders or proxy representatives, this could be a meaningful impact on the stock price. The board has already unanimously approved the deal, but without confirmation from the company's owners (shareholders), it still hangs on the hinges for now, in my view. This view is formed by the fact that many acquisitions, mergers, etc., do not eventually go through because of external factors- either 1) a higher bidder, 2) too low an offer from the consortium, or 3) regulatory intervention. These 3 look unlikely to occur, but definitely must not be ignored.
Notably, and perhaps importantly, the acquisition does not hinge upon a financing condition. The list of financiers for the transaction includes:
- Goldman Sachs.
- UBS.
- RBC Capital Markets.
- BMO Capital Markets.
- HSBC.
- Wells Fargo.
- Citigroup.
- Jefferies.
- Macquarie Capital.
- Natixis.
- Truist Securities.
3. Post-deal life for SYNH
On the presumption the transaction goes through, SYNH will transition into a privately held company, leading to the delisting of Syneos Health Class A common stock from the NASDAQ. Despite this change, there shouldn't be too much change operationally in my view. The company also said it is maintaining its headquarters in North Carolina.
What might the PE trio get to working on first? SYNH has had tremendously high COGS, ranging from 77-78% of turnover per year since 2018. This has been one trouble for the firm over this time because every extra $1 in turnover barely tickles the gross profit line on these COGS margins. Subsequently, it is of my view the consortium will look to address this issue, helping bring the firm's gross margin to the industry standard of 56%, not the trailing 22.7% it currently comes with.
If there so happens to be a non-successful vote in August, then it would be extremely wise to keep this chart in mind for SYNH because, in my view, for the firm to grow operations meaningfully, this aspect must be addressed in full.
Figure 2.
In short
Whilst the consortium's buyout of SYNH equity looks to be on its way to being solidified, there are still a few more steps to get through until the full approval. The shareholder vote on August 2 will be critical in the firm's future. The transaction, valued at $7.1Bn, values SYNH at its enterprise value today and so it would appear the buyers are getting a good deal at 10x forward EBITDA.
Notably, the market still has SYNH trading at a 1.7% discount to the offer price of $43 per share as I write, providing an interesting case for the merger arbitrage crowd. Still, it would be wise to stay well-tuned into the company's next steps, awaiting confirmation from shareholders and all other relevant stakeholders. If successful, we could see SYNH delisted and moved to a private company. If not, which looks unlikely, but shouldn't be ignored, SYNH has a gargantuan effort ahead of itself to push higher in the public markets. Hence, to summarize:
- Watch out for the decision from August 2nd,
- Keep an eye out for competing bids, regulatory input,
- Consider life after SYNH if you are a current shareholder.
I will be providing extensive coverage on this situation over the coming 3-4 weeks leading into the August meeting. Looking forward to seeing you there.
For further details see:
Syneos Health: Pre-Vote Checks, Trading At 1.7% Discount To PE Offer