Kirin: Blackmores Acquisition May Facilitate Its Ambition but Health Science Growth Still a Long Way

Narrow-moat Kirin’s 2503 announcement of its plan to acquire Australia’s largest nutritional supplement maker Blackmores for AUD 1.88 billion was no surprise as management has stressed that M&A will be a critical means to achieve its long-term target of JPY 500 billion in health science sales. We believe that Kirin is eyeing opportunities to leverage Blackmore’s high brand awareness, distribution capabilities, and know-how around regulatory compliance in China and Southeast Asia to expedite its growth of nutritional ingredients, a key component of the health science business. The deal, priced at around 20x 2023 PitchBook consensus EBITDA, appears somewhat pricy, although Blackmores remains on the way to recover margins from the dip caused by the coronavirus pandemic. The acquisition will have an immaterial impact on our fair value estimate of JPY 2,600. Whether Blackmores will be able to restore growth momentum and margins in China, as well as expand margins of the professional channel (Bioceuticals), is critical to its profit outlook.

Kirin is prepared to pay AUD 95 per share, a 23.7% premium on Blackmore’s closing share price on April 26. Given that Blackmores has only one factory, nearly 80% of the price that Kirin proposes to pay will be for goodwill and intangible assets. The deal size and timing caught us by surprise as we had expected that the acquisition targets would be small startups and Kirin would wait after it turned Kyowa Hakko Bio into profits. The deal, expected to be closed around August or September, will go through the Scheme of Arrangement procedure, a standard process for acquiring 100% stake of a public company in Australia. The deal will be funded by internal cash and debt.