Lonza to buy U.S. drug capsule maker Capsugel from KKR for $5.5 billion

By Brenna Hughes Neghaiwi and Ludwig Burger

(Reuters) - Swiss pharmaceutical supplier Lonza Group AG (LONN.S) on Thursday announced a deal to buy Capsugel, a U.S. maker of capsules and other drug delivery systems, from KKR & Co LP (KKR.N) for $5.5 billion in cash to broaden its product range.

Shares of Lonza fell nearly 5 percent on concerns about the acquisition's cost, more than 60 percent of the company's market value, and a planned capital increase of up to 3.3 billion Swiss francs ($3.22 billion).

The stock price had already fallen by 5.3 percent on Monday after Reuters reported Lonza was in advanced talks to purchase Capsugel from the private equity firm.

"We like the logic of the deal, but think it is not a bargain," analysts at Baader Helvea said. "The pending capital raising will weigh on Lonza's stock."

Lonza has long been seeking to bulk up with an acquisition. Earlier this year, it looked at U.S. company Catalent Inc (CTLT.N) to give it a wider range of active pharmaceutical ingredients and drug delivery products but failed to agree on price, sources have said.

Morristown, New Jersey-based Capsugel manufactures empty two-piece hard capsules as well as finished dosage forms for oral or inhalable drugs. It has more than 4,000 corporate customers and employs about 3,600 people in 13 facilities on three continents.

Lonza Chief Executive Officer Richard Ridinger said Capsugel's drug delivery products complemented his company's experience in pharmaceutical ingredients and contract manufacturing of active compounds.

The drug industry has been working to switch some established injectable medicines to the more-convenient oral delivery to boost patients' acceptance.

Lonza's industry customers could now order "either the whole menu or a la carte," Ridinger told analysts in a conference call. "There's nobody on this planet who can offer that."

But some analysts said Lonza could be neglecting the biotech drug industry, with its focus on large-molecule proteins that are typically for injection only.

"We are ... surprised to see an acquisition that has synergies with chemical drug manufacturing rather than biological manufacturing," said analyst Carla Baenziger of Swiss bank Vontobel.

Lonza has secured debt financing of $6.2 billion from Bank of America Merrill Lynch (BAC.N) and UBS Group AG (UBSG.S). Jefferies LLC is Lonza's lead financial adviser, the company said, while Goldman Sachs (GS.N) is sole financial adviser to Capsugel.

Lonza said it expected to complete the deal in the second quarter of 2017, subject to regulatory approval and closing conditions.

KKR PROFIT

KKR acquired Capsugel from Pfizer Inc (PFE.N) for $2.38 billion in 2011. Under KKR, Capsugel made three more acquisitions in the area of solubility enhancement to expand its drug delivery offerings beyond just selling capsules.

KKR now stands to receive $4.1 billion from the sale of Capsugel, including dividends and paying off the company's debt, according to people familiar with the matter who requested anonymity discussing confidential figures.

The private equity group only invested $1.1 billion in Capsugel's leveraged buyout, making this its fourth-largest profit over the past decade.

"The one insight we had is that this was a low-growth capsule business, but you can attach all sorts of technology and be a solutions provider to your customers," said Pete Stavros, head of KKR's industrials investment team.

Lonza and Capsugel recorded combined 2015 revenue of 4.8 billion francs and earnings of 1.14 billion francs before interest, tax, depreciation and amortization, excluding special items.

Lonza said it expected to cut 30 million francs of annual operating costs by the third year after closing the deal and generate 15 million francs in yearly tax savings.

By the fifth year, it expects annual savings of around 100 million francs.

Lonza said it intended to maintain its current dividend policy and net debt leverage of roughly three times EBITDA.

(This story corrects timeframe on KKR's fourth-largest profit in 17th paragraph)

(Additional reporting by Patricia Weiss in Frankfurt and Greg Roumeliotis in New York; editing by Lisa Von Ahn)