OREANDA-NEWS. The reported potential acquisition of listed German generic pharmaceuticals group Stada Arzneimittel by CVC Capital Partners does not signal a significant shift in the risk appetite of private equity firms or a return to the pre-crisis era of take-private leveraged buyouts, Fitch Ratings says.

Since 2013, financial sponsors in Europe have found public market Enterprise Valuations (EV) too high as a multiple of EBITDA to engage in large scale public-to-private buyouts. Instead they have remained net sellers as monetary policy stimulus has raised equity valuations.

Limited prospects for GDP and top-line revenue growth also favour trade buyers, which have greater scope for synergies, lower debt costs and less ambitious return and exit requirements than financial sponsors.

If the talks between CVC and Stada, reported by the Wall Street Journal but not confirmed by either party, led to a deal, we believe it would be a rare exception. Stada's recent share price performance implies it is in the lower end of its sectors' EV multiple range at just above 10x. Relative underperformance due to exposure to the Russian market and disagreement around accelerating growth opportunities has led to shareholder activism.

However Stada's specific corporate governance structure provides management with considerable M&A defences, as only registered shares with restricted transferability ('vinkulierte Namensaktien') are publicly traded. If the management board does not agree to ownership changes, these shares risk losing their voting rights. This makes it less likely that Stada would be sold to an international trade buyer, as in the recent case of Mylan of the US buying Sweden's MEDA.

Stada's position also plays into the recent tactics of financial sponsors, who are generally only willing to pay premium multiples for revenue growth and pricing power in niche industries, or for targets that complement existing portfolio companies. The latter situation appears to apply to CVC and Stada.

High multiples can be justified through potential synergies and increasing scale which may lead to stronger profit generation and a higher multiple at exit. In March 2016, CVC agreed to a EUR700M purchase of Italian generic pharmaceutical group DOC Generici from Charterhouse Capital partners at a 10x multiple, which followed the September 2015 purchase of a controlling stake in US-based global generic pharmaceutical group Alvogen by a CVC-led consortium which valued the company at USD2bn.

With an EV of over EUR4bn, Stada would represent CVC's largest generic pharma deal and the largest take-private LBO by a private equity sponsor in Europe since Alliance Boots in 2007.

Despite its size, debt investors would likely be attracted to the sector and Stada's cash-flow generation profile. CVC financed its acquisition of DOC Generici with around 50% equity and a similarly high equity contribution for Stada would likely further support a higher debt multiple towards the pre-crisis norm of 6x as bond and loan market demand improves. Private ownership would allow the pursuit of portfolio synergies, while raising operating profit margins would establish the basis for a future sale to a trade buyer at a higher multiple.

Mylan purchased MEDA for 13x EV/EBITDA, but post-synergies, the multiple may be closer to 9x. The MEDA valuation has led to some equity market commentary suggesting the reported Stada price may rise. If it did, this could give the impression that financial sponsors have lost their discipline. But Stada's specific circumstances would not indicate a trend towards large public-to-private deals, and CVC's approach appears consistent with the buy-and-build strategy that reflects the high valuation yet lower growth world that has constrained financial sponsor primary market volumes for the past few years.