Elanco to sell aqua business to Merck for $1.3B in cash

Elanco (ELAN) announced it has entered into an agreement to sell its aqua business to Merck Animal Health (MRK) for approximately $1.3B in cash, which represents approximately 7.4x the estimated 2023 revenue of the Elanco aqua business. Elanco’s aqua business includes products across both warm-water and cold-water species, generating an estimated $175M in revenue and approximately $92M in adjusted EBITDA, excluding the allocation of corporate costs, based on 2023 preliminary results. The divestiture includes current marketed brands, aqua R&D projects, the transfer of manufacturing sites in Prince Edward Island, Canada and Dong Nai, Vietnam and approximately 280 commercial and manufacturing employees. Upon closing of the transaction, Elanco plans to use the expected $1.05B to $1.1B of after-tax cash proceeds to pay down a portion of the Term Loan B debt. Elanco’s preliminary full year 2023 results, which do not include the effect of the sale of the aqua business, project net debt to adjusted EBITDA to be slightly below the midpoint of the company’s previous guidance range. Giving pro forma effect to the transaction for FY23, including the expected debt paydown and excluding the EBITDA associated with the aqua business, the company estimates the net leverage ratio would have been 0.6x to 0.7x lower, at or slightly below 5.0x. In 2024, with the anticipated debt paydown resulting from the transaction and from cash generated by the base business, the company expects to end the year with net debt to adjusted EBITDA in the mid-4x range. Further, the company expects net debt to adjusted EBITDA in high-3x to low-4x range by the end of 2025, driven by innovation fueled growth and continued debt paydown from improving free cash flow. The expected retirement of a portion of the Term Loan B debt will result in reduced interest expense of approximately $65M, or 11c of EPS, annually. For 2023, based on the midpoint of the company’s previous adjusted EPS guidance of 91c, net EPS dilution would be approximately 3c, or about 3%, while the company will be able to reduce net debt by approximately 20%. The transaction, which is subject to regulatory approvals and customary closing conditions and adjustments, is expected to close around mid-year. The Company plans to discuss the transaction further when it releases its fourth quarter and full year fiscal 2023 financial results on February 26.