Why is the Dechra Pharmaceuticals share price soaring?

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The past year has not been a good one for shareholders in Dechra Pharmaceuticals (LSE: DPH). The share price was down around 30% on a 12-month basis until today, when it shot up following some positive news released after yesterday’s market close.

As I write Friday morning, the shares are about 36% higher than they were at the start of the session.

Possible takeover

That news was about a possible cash offer to take over the firm. That would mean all Dechra shares would be bought by a potential acquirer, subject to agreement.

The possible offer comes from Swedish investment group EQT and the Abu Dhabi Investment Authority. It could be pitched at £40.70 per share. Dechra has said it would recommend such an offer, subject to terms and conditions.

However, the offer is well below the share price of just a couple of years ago, so I expect many Dechra shareholders will not welcome any such bid.

Where now for the share price?

Although the shares jumped this morning, they are trading around 7% lower than the possible offer price. There are a number of possible explanations for this.

The offer has not been formally made and therefore has not been agreed. EQT and its partner could walk away. Dechra may decide a deal cannot be struck on the right terms and so decline to recommend it.

If the takeover does go ahead, I expect the Dechra Pharmaceuticals share price to rise to roughly the offer level. That suggests there could be further upwards moves from the current price.

On top of that, I think there is the possibility another firm may decide to enter the fray now that Dechra is in play. It has a well-established business in an area with resilient demand and strong pricing power. Both financial investors and some of Dechra’s trade rivals are likely running their slide rules over the numbers right now.

I’m not buying

I have long liked the Dechra business and would consider buying its shares. But the reason I have not is because I feel they have been consistently overpriced. After today’s jump, they trade at a price-to-earnings ratio of over 100. That seems far too high to me.

A buyer might be able to strip out costs while adding manufacturing and distribution muscle. That could mean the current valuation could be attractive in a way that is not true for me as a private investor with a purely financial motivation.

But I do not buy shares just on the basis of a possible takeover bid. If I decided to add Dechra to my portfolio today, it would be as a long-term investor looking to buy into a high-quality business.

I think the current Dechra Pharmaceuticals share price remains unattractive. I will therefore not be buying, regardless of what further bid news may emerge.

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