BASF's Deal For Pronova Shows The Importance Of Good Nutrition

By Stephen D. Simpson, CFA | November 23, 2012 AAA

More and more, it seems like long-term success in chemicals and specialty materials is all about keeping an open mind toward reinvention. DuPont (NYSE:DD), for instance, is far removed from its legacy in products like gunpowder and nylon, and currently looks to advanced seed traits and nutrition as important growth markets. Likewise, DSM has moved on from coal, fertilizer and petrochemicals into areas like nutrition and biofuels.

DuPont's German cousin BASF (OTC:BASFY) is following in this path, announcing on Wednesday that it had reached an agreement to acquire Norwegian fish oil specialist Pronova for 12.50 Norwegian kroner per share, or about $845 million in enterprise value.

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A Cheap Deal for a High-Quality Supplement
At $845 million, BASF would be paying less than six times EV/EBITDA and only about a 4% premium to Pronova's close a day before the deal. With quite a bit of interest of late in the fish oil space, not to mention the low bid valuation, Pronova's shares are trading slightly above the bid value. Keep in mind, however, that shareholders holding more than half of Pronova's shares have agreed to the deal, though European laws give objecting minority investors more rights and leverage than in the United States.

Pronova is a leading supplier of pharmaceutical-grade fish oils - supplying the active ingredients for heart/cholesterol drug Lovaza (aka Omacor) to GlaxoSmithKline (NYSE:GSK) and Abbott Labs (NYSE:ABT). Pronova has also been actively looking to build outside of the pharmaceutical space, looking to position its fish oils into markets like clinical nutrition (parental nutrition), supplements, infant formulas and food additives - particularly those markets where especially high-grade concentrates can attract appealing pricing, and to do that they needed to turn to mergers and acquisitions.

This is not BASF's first foray into fish oil. BASF bought Equatec earlier this year, and Pronova should vault it into a leading market position in Europe and the U.S. alongside companies like Croda and DSM (which has spent about $1.6 billion over the past 18 months on Martek and Ocean Nutrition, and holds a leading share in concentrates for infant formulas).

A Deal That Says Little-to-Nothing for Amarin
One of the most controversial stocks of late in biotech has been Amarin (Nasdaq:AMRN) - an Irish biotech that has developed a highly purified omega-3 product (Vascepa) for heart disease. There has been ample debate about the sales prospects for Vascepa, including suggestions that doctors are turning away from omega-3 fatty acids/fish oil as a treatment for cholesterol and heart disease. Even more controversial is the question as to whether Amarin can secure New Chemical Entity (NCE) status from the FDA and with it, enhanced protection from potential generic competition.

Amarin has also been pegged as a company in play, with investors openly speculating on which Big Pharma may offer shareholders a lucrative buyout.

This BASF-Pronova deal, however, would seem to have little to do directly with Amarin. While it's true that Pronova supplies the key ingredient(s) for Lovaza, the drug has gone generic in Europe and will go off-patent in the U.S. in 2017. While the bulk of Pronova's revenue and profits today come from Lovaza, BASF management was quite clear that they saw the real value in the deal coming from the ongoing growth of fish oil/omega-3 fatty acids as supplements and food additives. For instance, BASF estimated that the current omega-3 concentrate market is worth about $1.1 billion today and likely to grow to over $2 billion by the end of this decade.

What's more, and I believe this is a key detail, Amarin does not produce the the ethyl-EPA that serves as the active ingredient to Vascepa. In Pronova, BASF is buying one of the largest independent producers of highly purified/concentrated omega-3 fatty acids, whereas a buyer of Amarin would primarily be acquiring the rights to market that particular formulation as a prescription treatment for heart diseases and/or high cholesterol. Consequently, I don't think Amarin investors can use the BASF-Pronova as any sort of real benchmark or comparable for a possible deal for their company.

The Bottom Line
As recent deals like Nestle's (OTC:NSRGY) bid for Pfizer's (NYSE:PFE) infant nutrition business and Reckitt Benckiser's (OTC:RBGPY) deal for Schiff Nutrition (NYSE:SHF) suggest, there is considerable interest these days in nutrition as a growth market. What's more, the M&A activity of DSM and BASF makes it sound like there's going to be considerable ongoing interest in exploiting fish oils and omega-3 fatty acids to improve the nutritional content of a wide range of food products, including infant formula.

Even with the support of major shareholders, BASF may not have Pronova wrapped up just yet. I would not be surprised to see a rival bidder step up, particularly since the valuation is not all that demanding yet. Whether a company like Bayer (OTC:BAYRY), frustrated in its attempt to buy Schiff, steps up, odds are that fish oils and omega-3 fatty acids are going to find their way into more and more clinical and consumer products in the years to come.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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