September 3rd CBTE announced the definitive Share Purchase Agreement to Acquire GL Biochem (Shanghai) and Associated Businesses. The transaction looks like a reverse takeover: it is an all-stock transaction; CBTE will issue 6.6 million shares to owners of GL Biochem, which will give GL Biochem 68% to 80% ownership of CBTE. CBTE will also receive an option, which will be good for 12 months, to buy three GL Biochem’s subsidiaries. At the maximum number of shares, owners of GL Biochem would end up owning 80% of the new CBTE. The transaction value is about $13.58 million, I estimate about 15%-20% discount of my GL Biochem fundamental value due to GL Biochem audit risk and the 80% control at completion of the deal. I believe provided the short term risks of NASDAQ and loan provision compliance, GL Biochem PCAOB-qualified audits and completion of the acquisition, the long term prospect of the new post acquisition CBTE are positive: stronger balance sheet, healthy cash flow for safety net and expansion, more diversified operations and market (China and USA), profitable and fast growing niche of peptides. Based on comparable and DCF, my estimated target price for the combined entity based on 5 years financial projection and clear synergy is $2.0.
UPSIDE
Synergies and economies of scales critical success factor in peptide market-> Synergies and economies of scales: Mimotopes and GL Biochem have developed a working relationship for over 4 years. The combination may improve quality, low-cost capacity to compete with new entrants. -> In Chinese market, the new entity will benefit from stronger Mimotopes (CBTE) online presence and eCommerce platform. -> A broader client base: leverage Existing relationships of both GL Biochem's and Mimotopes' CBTE’s current subsidiaries -> Combination of two experience successful management teams as well as complimentary commercial relationships will assist in business growth and development for the combined entity. -> Exposure to the increasing number of peptide-related discovery projects, the transaction provides the new entity the opportunity to cross sell vertically integrated and horizontally integrated offerings to customers.
Financial strength of GL Biochem -> GL Biochem healthy balance sheet, low debt and substantial cash will provide liquidity to CBTE and improve the combined entity financial strength. CBTE needs a profitable business.
-> GL Biochem will provide a strong net income and growth to CBTE. GL Biochem generates about $14 million of annual revenue and $2-$3 million of net income, representing a CAGR of 40%. GL Biochem reported a 20% increase in revenues in the first half of 2009. GL Biochem (Shanghai) Ltd, privately owned, is the international leader in the research, development, manufacture and marketing of peptides, one of the fastest growing new drugs segment. With about 1,000 highly-trained staff and state-of-the-art facilities. Today GL Biochem is the largest manufacturer of research-grade peptides and peptide reagents globally. My comparables analyze reveals a target price in the range of $15.4 - $15.7 million range. This price takes into account the Long-term forecast of the company revenue and all GL subsidiaries.
Diversification of operation and markets will ensure cash flow and revenue stability-> The new CBTE will be positioned as a major global provider on three geographic areas in the field of peptide manufacturing and contract research and will have an estimated $18 million in annual revenues, $3 million in net income and a strong growth profile. -> The combined entity will become a globally dominant position in the peptide market in three geographic area -> The merger will create the leading contract research company in the fast growing field of peptide drug development with operations in three continents (US, China and Australia) and expertise to develop peptide therapeutics from the bench-top to the clinic.
Growing market segment-> New global markets for combined entity. Strengthening of CBTE’s China-strategy and GL Biochem USA-access strategy. New entity will control about 17% of current peptides market.
DOWNSIDE
-> Short term:No positive outlook for CBTE standalone in the foreseeable future if the merger is not completed. In contrast GL Biochem has healthy balance sheet with strong liquidity and the right strategy in a growing market segment. The transaction is subject to the completion of PCAOB-qualified audits of GL Biochem and the approval of CBTE shareholders and lenders. Convertibles notes $1.4MM expired end of 2009.
If the synergies are not quickly materialise, CBTE weak financial performance may deteriorates further dragging the combined entity performance. CBTE reported first quarter revenues of $2 million and a loss of $815K. Relatively small market capitalization under $6M. The company also has a mortgage debt due end of the year. Besides, CBTE risk to be delisted and is not in compliance with provisions of the loan and had to obtain waivers from its bankers. First quarter 2009 cash flow was just $180K. -> Long-term: fierce and rapid competition in a growing market segment. New players entering in the market will decrease the margin. The combined entity needs to maintain quality assurance, experienced and knowledgeable staff , attract new customers and maintain existing customers, and maintain administrative and other overhead costs low relative to COGS.
'Disclosure: No positions'
BOS Price at posting:
2.3¢ Sentiment: None Disclosure: Held
