Shares in Australian Pharmaceutical Industries Ltd (ASX: API), the health and beauty company which is partly owned by Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), were up 8% today after the company announced a $127.4 million agreement to acquire the assets of Clearskincare Clinics.
The purchase price will be paid in installments over three years.
According to the announcement, API will initially acquire a 50.1% controlling stake and gradually increase this to 100% ownership by September 2021.
The transaction will be funded by debt facilities that have been established for the acquisition.
Clearskincare has 42 clinics in Australia and 2 in New Zealand which provide laser hair removal, skin treatments and cosmetic injectable services.
Impact on API's earnings
API said that after accounting for interest costs on new debt facilities, it expects the impact of the acquisition to be earnings per share (EPS) positive in FY 19. This is based on Clearskincare clinics' track record of growth and strong cash generation which is expected to continue going forward.
Benefits to API
In addition to being EPS accretive, management flagged a number of benefits for API in doing this deal including:
- Marketing synergies given that Clearskincare and Priceline have a similar customer base
- Diversification of revenue sources away from government funding
- Well managed founder led business with an established market position
Foolish Takeaway
The full $127.4 million acquisition was made based on a valuation of 7.6 times EBITDA and the initial payment was based on a valuation 8.9 times FY 19's forecast EBITDA.
This is a premium to the 6 times EBITDA that API itself trades at (assuming the second half of FY 18 replicates the 1H18 EBITDA of $58.7 million).
That's not cheap for a slow growing business but API has defensive qualities and strong consumer brands such as Priceline and Soul Pattinson. The Clearskincare acquisition will complement and diversify this suite of brands.
API has a 10-year dividend growth rate of 26% and looking forward, I expect that to continue as the company benefits from a growing and ageing population.
