CSL, Commonwealth Serum Laboratories Limited is an Australian based company manufacturing medical products, with its head office located in Parkville Australia. CSL also operates around the globe in over 27 countries, including Germany, Switzerland and the US as well as employing over 10,000 people worldwide. Its major course of operations is in the biotechnology industry under the industry group Pharmaceuticals, Biotechnology & Life Sciences of Health Care sector. The company is also involved with research and development, manufacturing and marketing of products including plasma products, vaccines and pharmaceuticals, antivenoms and also cell culture reagents. CSL Limited (2010). The products distributed by CSL are made locally in the US and New Zealand
CSL dates back to its emergence in 1916, with its inception being founded "to service the health needs of a nation isolated by war." CSL Limited (2010). In 1994 the company was then made public and listed on the Australian stock exchange. As being a well documented and established company, CSL with its combined heritage and more than 90 years in its field has now become one of the most innovative companies in its industry today.
CSL has also been active in its time of operations, acquiring "ZLB in 2000 and Aventis Behring in 2004." Invest Smart (2009). In 2005 it also developed a cervical cancer vaccine and further in 2006 acquired Zenyth Therapeutics and Vivaglobin, while in 2008 CSL "signed a five year agreement with the Canadian Blood Service to fractionate Canadian plasma and supply a broad range of plasma products", CSL Limited (2010) all being momentous milestones for the company and introducing the firm into the global plasma market.
Through its expansions and operations CSL has now become one of the biggest players in its global industry and diversifying its sales around the world, as of 2009 only "15% where in Australia with the big majority recorded in Europe and the US, 30 and 38 percent respectively". CSL Limited (2010). Signifying the industries targets are in the US and European hospitals, with CSL's major competitors being "Baxter and Talecris". InvestSMART (2010).
Reasons why CSL could be an attractive target
Apart from its recent acquisitions listed above, CSL is now one of the biggest manufacturing services in the world, having been investing in this area in the last few years and is also one of the largest distributors of plasma therapies. It has also declared its European approvals, which has recently been extended, locking in its future in European countries, its products and services are now recorded in 28 different countries and have their sights set on markets such as Canada, Russia and China which will further contribute to growth in 2011.
Apart from these operations CSL has just recently announced for the 2009-2010 financial year profits of $1,053 million, an increase of 22%, total sales revenue of $4.5 billion also up by 10%. Cash flow from operations up 14% and its final divididend was also up 13% pleasing investors worldwide. ASX (2010). And with a strong balance sheet and cash flows CSL faces an excellent foreseeable future.
Apart from the key indicators listed above, other aspects that make CSL a potentially attractive target include:
Stable Growth - With CSL experiencing stable growth over the period, it has also contributed to a low levered beta of PUT IN indicating the company's insensitivity to market fluctuations and cycle effects. Motives for the companies stable growth even over the GWC can be indicated to households, as pharmaceutical products cannot be replaced by households as no other alternatives exist. Also showing further evidence was when CSL's share price at the start of 2009 was at a peak while many other companies around the world were suffering due to the downward economy.
Industry - As being one of the largest companies in its industry and of being an Australian grown company, Australia in general does not have a big effect in this industry in world terms, hence a leverage buyout proposal of a successful and well established company in a small industry in Australia would make it an attractive target as CSL is somewhat unaffected by what occurs in the Australian economy.
Well Recognized - Another reason why CSL could be an attractive target is its presents, it's been around for over 90 years is one of the leaders in its industry, and as stated above it has a strong brand name and is the domestic front runner, is also well known worldwide in major countries (28 countries) and has become the second market leader in producing plasma therapeutics, accounting for 15% of the market share. Diversification is also another drawcard that has arisen for CSL, being a large and well diversified company operating globally not just domestically this opens up CSL to the world and not just relying on one country, and having a broader range of success it reduces the result of market risk associated with one country.
Below is evidence of CSL's financial position with regards to key ratios:
Revenue-
The above table shows that CSL has had strong growth up to 2009, where its revenue remained fairly stable only declining 3.60%, with the rapid rise in 2009 due to the swine flu epidemic. However as this was an outbreak it couldn't be sustained in 2010 and hence the decline has resulted from this. CSL expects further improvement again in 2011 and going on past years trends the company's revenue has remained fairly strong.
Liquidity -
As liquidity pays a big part into a company's everyday cash dealings it's extremely important to see CSL's liquidity position in order for a LBO. The above table shows strong signs of CSL being able to meet its short term debt commitments with the ratio increasing yearly from 2006.
Profit -
CSL also showed increasing profit margin over the period and an upward trend, with the only insignificant increase being in 2006 which was due the nonrecurring item "contingent payment" of AUD$328.5 million. CSL Limited (2010). And importantly to see that the 2010 figure didn't drop after the 2009 swine break out, showing CSL still maintained a high profit margin. The stable increase in profit margin shows evidence to the LBO argument that high growth may facilitate the necessity to increase investment in working capital while unstable growth might threaten cash flow, thus in both cases, causing the cash flows unpredictable.
Cash Flow -
The company's cash flows have also increased over the recent period, indicating positive and steady cash flow from the company, with the biggest jump occurring from 2007-2009 where its cash flow from operating activity more than doubled in size indicating a healthy firm that is maintaining a strong cash position.
Potential Risks
LBO's face numerous risks and Macquarie is of no exception. Financial distress is said to be one of the most well known events that could occur, this may result if insufficient cash flows are being produced by the company to pay back debt and as a result cause bankruptcy. As with an LBO there is an extremely high debt to equity ratio not leaving space for faults, thus these excessively large debt levels can further add to bankruptcy as a result of being unable to further borrow, it therefore puts strain on the debt servicing commitments of the company and thus with less liquidity and funds, future profitable prospects are overlooked. The credit rating of the company may also decrease as most of the assets are either being used as collateral or that they have been invested into a risky development, also causing obscurity for unforseen events such as the recent economic downturn the world has just gone through, and "litigation or changes in the regulatory environment" 12manage (2010), indicating that no company can be 100% safe all the time.
In addition, as CSL is primarily involved with research, finding new and innovative products while also manufacturing and marketing it maintains extremely high expenses through its course of day to day operations effecting its net earnings, yet Macquarie after the LBO will be unable to alter such operations as these courses of actions are primary to the companies existence. The industry of CSL also poses a threat, being such a unique industry there is always that constant pressure of implementing and creating new and innovative products, making sure the new products are not out dated, are up to the industry's expectations and standards, and are not facing public backlash over their products whether it be from doctors, pharmacy's and or the industries professionals. Also one of the main motives for an IPO is that the future forecasted performance of the takeover company is performing strongly or is going to perform strongly based on future projections only, however if these future forecasts turn out to be inconclusive or incorrect this could have a serious impact for the proposed LBO and cause major effect to future investors/shareholders and management.
Further evidence has also been backed by historical performances of past LBO's, it is said that LBO's are more likely to fail than other firms are according to Platt (2006). It's also estimated that more than 4% of LBO's fail annually, higher than the approximate 1% failure rate of normally levered firms. Platt (2006). However reasons for the failure have been known to occur to both types of businesses whether they be levered or not, with the main explanations surrounding insufficient gross margins or extreme debt levels.
These risks have the effect of causing the LBO trouble in paying scheduled interest payments, technical default or even liquidation. Or even misalignment between future shareholders and management which may result with new and weaker management thus causing conflict between the two and causing the company into further financial distress affecting its success and growth, these scenarios are all realistic chances of posing risks to the proposed LBO.
Possible Exit Strategies
There are numerous ways in which Macquarie could exit this LBO, it could be through an IPO, initial public offering where the company's shares would again be floated on the ASX, a spin off, a breakup of assets, or either by selling to a strategic buyer or to another financial buyer or by a management buyout. "Preferably an exit strategy would give rise to financial buyers to realize gains on their investments" Macabacus (2010) through one of the strategies listed above. There is also RLBO's, reverse leveraged buyouts which by figures from 2005 and 2006 indicate it was one of the most popular exit strategies. Cao (2009). With an exit strategy however there must be clear and precise steps involved that makes it easy with the best realized returns, also taking into consideration expected future economic conditions and the performance of CSL, with financial buyers typically expecting to realize a return on the LBO investment within 3 to 7 years which is detailed below.
Having taken the above analysis into consideration, CSL's performance over the last few years including the swine out break the recent economic downturn, in conjunction with its expected results we believe the best exit strategy would be an IPO as the economy especially in Australia is now starting to rise from its fall, the growing Australian dollar, the future forecasted performance of CSL as listed above will all contribute to help create a hot IPO issuance period that will allow a realizing cash return regardless of any greater unrealized returns.
