Anti-Climax

 

A merger has been announced between two listed Australian biotechnology companies, Peptech and EvoGenix. EvoGenix shareholders approved the merger proposal to form a yet-to-be renamed company from the two antibody therapeutics companies. It is expected that the combined funds of the merged companies will be $167 million in cash, which will be dedicated to driving product development.

 

In the highly competitive climate of antibody therapies, the merger is intended to establish a highly prominent Australian player on the global stage.

 

Sydney-based Peptech, the larger of the two companies, was founded in 1985, listed the following year, and over the past six years has generated revenues of over $300 million from commercialisation of its products. It is in the process of transition to a mid-stage development company as it brings several new products into clinical trials. Its principal antibody product, PN0621, is being developed into a drug to combat auto-immune diseases such as rheumatoid arthritis and Crohn’s disease.

 

EvoGenix is the younger company, established in 2001 with venture capital investment, develops non-human antibodies into ‘humanised’ derivatives that can be clinically exploited. Leading up to the merger, EvoGenix raised $5 million from existing investors.

 

The merger comes on the back of Peptech’s recent sale of its share in UK-based Domantis Ltd to GlaxoSmithKline for $178 million (previously reported in issue 20 – Feb/Mar ’07), resulting in a return of $138.2 million from an originally invested $40.2 million.

 

 

 

The Senate Standing Committee on Economics has tabled a report resulting from its inquiry into the influence of private equity on the Australian economy.

 

The Committee delivered a favourable view of private equity, concluding in its report that by providing stimulation to “underperforming companies”, it was in the interest of Australian consumers, shareholders and workers.

 

The inquiry received submissions from a number of government and industry bodies, including the RBA Council for Financial Regulators, ASIC, AVCAL and PricewaterhouseCoopers.

 

The report was well received by AVCAL, which praised its timeliness in confirming private equity’s positive contribution to economic development.

 

Mr Jeremy Cooper, Deputy Chairman of ASIC, commented that the rules of Australian financial regulation are appropriately stringent, while still containing sufficient flexibility to manage private equity activity.

 

 

 

The Australian Tax Office (ATO) has announced a shift in its compliance verification of small-to-medium enterprises toward taking a broader view of their activities.

 

Rather than looking into individual irregularities in isolation, the ATO will now focus on the broader context of an SME’s business lifecycle and on relationships between groups of closely related entities.

 

The ATO will be paying closer attention to tax triggers such as considerable growth spurts, offshore expansion, company restructuring, management succession and business disposals. Small companies that undertake these activities in the next year should be prepared for a call from the taxman.

 

 

 

South Australian food and beverage processing company Cavitus has closed a first round of capital raising with an investment of $2 million by Playford Capital. The funding will go toward further development and IP protection of its high power ultrasonics (HPU) technology.

 

The technology is being developed for application to the wine industry as a novel method of ridding wine barrels of Brettanomyces dekerra. This pervasive yeast is believed to currently strip hundreds of millions of dollars from the value of wines each year.

 

In light of the new investment, Cavitus is undertaking negotiations with international winemakers for trials of the HPU system. Cavitus has its sights firmly set on the multi-billion dollar global food and beverage industry, with ongoing product development and registration of patents for novel uses of HPU technology its current focus.

 

 

 

By Adrian Herbert

 

Owners of small-to-medium-size Australian businesses are now quite likely to be approached by private equity investors. This is an inevitable consequence of the growth of funds in the sector. The money needs to be invested somewhere so the pressure is on to find suitable businesses.

 

If you are invited to talk to a private equity executive, don’t, as some business owners have done, regard it as a threat and reject the invitation; rather regard it as an opportunity.

 

When private equity calls, call back.

 

Both private equity firms and the advisory businesses that provide services to the sector, spend a lot of time talking to business owners and this can be a two-way street. Useful information flows both ways.

 

If private equity makes an initial approach to talk to you – probably through an intermediary such as your accountant or business adviser – it is possible they might be contemplating making an offer for your business, but it is more likely they are researching your industry to gain a better understanding of the opportunities it offers.

 

Talking to private equity is likely to be to your advantage in the long run. For example, an initial approach could mean a firm is considering a consolidation play in your industry. If that is the case, refusing to talk could result in you missing out on the opportunity for your business to be at the core of that strategy. This would enable you to be a partner and share in the success of the venture.

 

If private equity is interested in taking control of your business, take it as a compliment – you must be doing something right! Sure, you might have no interest in selling but keep in mind that old maxim: any business should always be for sale at the right price. It will always be better to know sooner rather than later how much private equity will be prepared to pay for your business and what you can do to improve that offer.

 

Of course, any private equity investor would like to buy a business for less than its true value. That would make their objective of exiting within a few years at a high return so much easier to achieve. But it is unlikely that firms would expect to buy cheaply in most industries in current economic conditions.

 

Getting a dollar value for 50 cents might have been achieved in some deals maybe five years ago, says managing director of Gresham Private Equity Roy McKelvie. These days, however, his firm expects to pay fair value. In fact, he says, he has no doubt firms have paid significant premiums to acquire businesses in some recent deals.

 

Increasing competition to acquire key businesses has forced private equity firms to pay higher earnings multiples, earnings multiples being the usual way of valuing a business.

 

Private equity investors will usually maintain that if they invest, it will be business as usual, with the same executives running day-to-day operations. But in most cases the investor will also insist on taking a majority interest.  

 

Don’t be discouraged by this. Holding a majority interest is, in most cases, seen as essential to protect the investment. The last thing private equity investors will want to do is to step in and take day-to-day control of the business, but they will regard it as essential to have the power to do so if they consider this necessary.  

 

Mr McKelvie says an important part of a private equity executive’s work is to keep in touch with owners and executives in businesses across the full spectrum of industries in which the firm might be interested in investing.

 

“Of course it’s difficult, as there is never much time available, but it is important to keep in touch. I might call a contact or have a coffee with him and discuss what is going on in his industry, and others. There is value in learning how things are done in other industries … and, hopefully, I’ll learn something too,” he says.

 

And private equity does not only talk to the most ambitious big city business executives. 

 

Head of private equity at AMP Capital Investors, Greg Smith, says most of his team’s deals are sourced through the widespread AMP network, often outside the capital cities. A key to that success has been the team members’ ability to empathise with “down to earth” people who have focused on building their businesses over many years.

 

AMP Capital Investors helps many of these people to expand their businesses.

 

Over time, he says, the long time owners of many other businesses realise the need to develop succession plans and are introduced to the private equity team.

 

Most, he says, are then pleased to accept clearly presented plans that will allow them to access their equity while at the same time see their business stepped up to the next level.

 

Whatever stage your business is at, bear in mind that private equity deals are rarely done ‘out of the blue’. Usually, a formal deal process will have been the result of an introduction made some years ago, occasional calls and a few casual meetings.

So, when private equity calls, do call back.