Vitaco Holdings Ltd shares surge on takeover bid: What you need to know

Credit: Musashi

Shares of nutritional products business Vitaco Holdings Ltd (ASX: VIT) are flying higher today after the company entered into a Scheme Implementation Deed with a Chinese-based consortium to acquire 100% of its shares.

The consortium members are Shanghai Pharma, a pharmaceutical group with a market capitalisation of $10.1 billion, and Primavera Capital, a leading Asia-based investment firm.

The board of directors have put their full support behind the $313.7 million deal that values the company at $2.25 per share – a 27.8% premium from yesterday’s closing price. The deal is also a 7% premium from Vitaco’s September 2015 IPO price of $2.10.

Vitaco’s chairman, Greg Richards said in the announcement: “The Scheme represents attractive upfront and certain value for shareholders, particularly given ongoing volatile macroeconomic conditions and regulatory uncertainty in China”.

The deal has also received support from one of Vitaco’s biggest shareholders, Next Capital, who owns 15.3% of the shares.

Vitaco also provided its preliminary financial results for FY16 that showed the company delivered revenue growth of 23.5% to $212.9 million. Earnings were in line with the prospectus forecast with pro forma NPAT and EPS of $13.1 million and 9.4 cents per share, respectively.

While this was a solid performance, the deal is likely to get the support of other shareholders based on the somewhat subdued outlook for FY17 provided by management. Vitaco stated that it expects only modest earnings growth in FY17 “due to additional business investment required to support longer-term growth, the impact from the loss of the Trilogy contract and continued regulatory uncertainty in China”.

Vitaco has committed to increasing its operating costs by increasing its marketing spend and staff numbers in an attempt to gain further penetration into the Chinese market. There is also the potential for higher capital expenditure with the company looking to expand its manufacturing and warehousing footprint in Auckland.

Judging by the reaction of investors to other companies operating in the Chinese consumer sector like Blackmores Limited (ASX: BKL) and Bellamy’s Australia Ltd (ASX: BAL), today’s announcement has highlighted the point that there may be further takeover offers down the road from Chinese based consortiums. Shares of Blackmores and Bellamy’s have surged 3.5% and 5.1%, respectively, although investors should note that these two companies are much larger and trade at significantly higher valuations than that of Vitaco.

Nevertheless, today’s announcement highlights the point that Australian-based products remain in high demand from Asian consumers and that this is likely to remain a growth story.

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Motley Fool contributor Christopher Georges owns shares of Blackmores Limited and Vitaco Holdings. The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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