Rival bid for listed IVF business

London-based private equity firm CapVest has made its first Australian bid with a $650 million take-private offer for Virtus Health (ASX: VRT).

CapVest, which focuses on buy-and-build strategies in “non-discretionary” sectors, has made a $7.60-per-share non-binding offer to acquire Virtus under a scheme of arrangement, or via an alternative off-market takeover. The offer convinced the board of the in vitro fertilisation (IVF) services company to grant CapVest exclusive due diligence.

The Virtus board’s decision has given the mid-market firm the inside running against an earlier bid from BGH Capital which aspires to be Australia’s “pre-eminent private equity firm”.

Virtus reported on 14 December that BGH had made an unsolicited $7.10-per-share offer. Virtus said the Melbourne-based firm had also advised that it had acquired a 9.9% stake in the company and had an agreement to acquire a further 10 per cent stake. Virtus responded saying its board had begun assessing the non-binding initial offer.

Now it appears BGH is the party taken by surprise.

In a 20 January announcement, Virtus said that in addition to being prepared to make a higher indicative scheme of arrangement offer than BGH, CapVest had indicated that, subject to satisfactory due diligence, it was willing to proceed with an alternative transaction structure such as an off-market takeover bid requiring acceptance by 50.1% of Virtus shareholders. This alternative transaction would, however, be at a lower rate of $7.50 cash per share.

Virtus has granted CapVest a 40-day exclusivity period from the opening of its dataroom.

After that time, the company will be able to negotiate with any party that offers a “genuine competing proposal”.

Virtus said that in addition to satisfactory due diligence, the CapVest proposal required its board to agree to unanimously recommend the offer in the absence of a superior proposal and subject to an independent expert concluding that it was fair and reasonable.

The deal includes standard protection provisions for the bidder, including a $2 million break fee, to be paid in certain circumstances, and the right for CapVest to match an alternative offer. The break fee rises to $4 million if the Virtus board recommends a superior competing proposal within a specified timeframe.

Whether BGH or any other party will make an alternative offer is far from certain so, presumably, Virtus will be satisfied if a deal can be closed at $7.50 a share or above.

CapVest, which has close to $8 billion in assets under management, said Virtus satisfies all its investment criteria. Over the last five years, CapVest had spent considerable time mapping the fertility services market globally and had analysed in detail numerous potential acquisitions in the sector, providing it with an in-depth understanding of the opportunities and challenges, as well as underlying sector trends and operating models, it said.

Healthcare accounts for around 50% of CapVest’s investment activity and current investments include stakes in NextPharma, a leading European contract drug manufacturer, and Curium, a global leader in production of nuclear tracers used in diagnostic imaging.

Virtus is taking financial advice on the CapVest bid from Jefferies Australia and legal advice from Gilbert + Tobin.

Ashurst is providing legal advice to CapVest.

Sydney-based Virtus provides fertility care and related specialised diagnostic and day hospital services. The company employs 128 leading fertility specialists supported by more than 1,300 professional staff.

Quadrant Private Equity invested in Sydney-based IVF Australia in May 2008. IVF Australia was combined with Melbourne IVF in November 2008 and with Queensland Fertility Group in October 2009 to form Virtus.

Quadrant sold its entire 46.3% stake in Virtus in the company’s June 2013 IPO. The IPO raised $338.7 million at $5.68 per share. The shares listed on the ASX at $6.07.

The announcement of the BGH bid on 14 December lifted the Virtus share price from $5.20 to $7.00 and the CapVest bid from $6.67 to $7.18.