Novozymes and Chr. Hansen Announce Intention To Merge; Raising FVEs for Both Firms

Wide-moat Novozymes and wide-moat Chr. Hansen announced their intention to merge via exchange of shares. Essentially, Novozymes is acquiring Chr. Hansen at an implied 49% premium for the free-float shares of Chr. Hansen (blended premium of 38% after incorporating Novo Holdings' 22% interest in Chr. Hansen at essentially no premium given the company is the anchor shareholder in both companies). At the close of treading on Dec. 12, Novozymes shares were down 15% while Chr. Hansen shares were up 18%, likely reflecting the high implied multiple of the transaction (24 times EBITDA before synergies) and aggressive synergy assumptions (15%-17% including revenue and cost synergies). However, given our relative valuations for the two companies differ from the market (Novozymes overvalued at 1.1 times price/fair value estimate and Chr. Hansen undervalued at 0.8 times price/fair value estimate, preannouncement), the deal terms work out to be fair on our numbers despite excluding all the revenue synergies. Thus, we are increasing the fair value estimates of both companies based on our allocation of the cost synergies boost to valuation. Novozymes’ fair value estimate rises 5% to DKK 395 from DKK 375 while Chr. Hansen’s fair value estimate rises 13% to DKK 620 from DKK 550 (reflecting the free-float shares). We maintain our wide moat rating for each company and expect to maintain our wide moat rating for the combined company. At these levels, Novozymes shares look fairly valued while Chr. Hansen shares look moderately undervalued.