Recordati Industria Chimica e Farmaceutica S.p.A. (REC) Earnings Call Transcript & Summary

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Recordati reverse merger announcement conference call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Marianne Tatschke, Investor Relations of Recordati. Please go ahead, madam.

Good morning to everybody, and thank you for attending the Recordati conference call. Andrea Recordati, our CEO; and Luigi La Corte, CFO, will be explaining our recent announcement of a reverse merger transaction. For a better understanding of this presentation, please access the certain slides available on our website, www.recordati.com, under the Investors section and Presentations tab. At the end of the presentation, we will answer any questions you may have. Andrea, please go ahead.

Thank you. Thank you, Marianne, and thank you, everybody, for connecting this morning through this reverse merger announcement conference call. So after 2 years, the majority ownership of Recordati by CVC Partners, the project was started with the aim of shortening the control chain with respect to the operating companies of the group. Recordati Board of Directors has now approved the project, which, of course, will be then held to a vote at an Extraordinary Shareholder Meeting. The Board approved the incorporation of both Rossini Investimenti and Fimei in Recordati. Following the merger, Rossini S.a.r.l will directly own the 51.82% holding in Recordati currently held by Fimei. This decision provides several benefits to both the majority shareholders and to the Recordati group. The merger aims at shortening the chain of control with respect to the operating companies of the group, resulting in a simplification of the corporate governance structure and in a reduction in the costs associated with maintenance of the disappearing companies; and for the surviving company, in lower taxes due to the tax benefits transferred by the disappearing companies. The transaction provides a tax benefit for Recordati, as mentioned, deriving from the possibility of using the ACE surplus approved by Rossini Investimenti with a nonrecurring reduction in taxes of approximately EUR 12.9 million and thereafter, an annual recurring benefit of around EUR 1.3 million. Most importantly, the net asset and income profile of Recordati remains substantially in line with the current one. In particular, the merger does not alter Recordati's net financial position and, therefore, its investment capability nor its capital allocation strategy or policy. Furthermore, the shareholdings of the main shareholder and those of other investors are unaffected by this transaction. I will now leave the floor to our CFO, Luigi La Corte, to take you through the technical details of the proposed merger and answer any questions you might have. Thank you very much. Luigi, the floor is yours.

Thank you, Andrea, and good morning, everyone. So on Slide 3, I will illustrate what the merger plan foresees and what the end result will be. I'll start first with a little bit of background. As I'm sure you will recall, in 2018, Rossini S.a.r.l. and ultimately, Rossini Luxembourg S.a.r.l. acquired the majority stake in Recordati via the acquisition through Rossini Investimenti S.p.a., the new co, of 100% of the share capital of Fimei, the holding company of the previous owners. Rossini Investimenti and Fimei are 2 pure holding company with, as noted on the slide, very little in terms of additional net assets beyond the shareholding in Recordati. In fact, you will see both Rossini and Fimei excluding the shareholding in Recordati have net assets of around EUR 2 million at the end of June 2020. Both entities also have no financial debt. It is, as you'll appreciate, a fairly complex, long chain of control. As contemplated already in the tender offer documents at the time of the acquisition in 2018, Rossini Luxembourg sent to Recordati and the other companies a request in June to move forward with the process to merge Rossini Investimenti and Fimei into Recordati. They did so in June following a positive ruling by the Italian tax authorities, which confirmed Rossini Investimenti's entitlement through the ACE benefit, which is described in more detail in the appendix, but essentially is -- allows a deduction for a notional return on the capital, which was injected into the company at the time of the acquisition. Following receipt of the request, Recordati with Fimei and Rossini have put in place the procedure, which is foreseen for it is a major transaction with a related party to assess the merger. And the merger plan, which was foreseen -- which has been agreed, foresees, first of all, that -- any cash -- net cash that is residual in the companies net of charges, taxes, costs and debt would be paid out prior to the effective date of the merger. And also, that Rossini Investimenti and Fimei would be discharged of any obligations that they have arising from the original acquisition of Fimei. As a result, at the effective date, Rossini Investimenti and Fimei effectively will only hold the shares in Recordati. Rossini shares will only hold the shares in Fimei. And the merger plan foresees that the shares, which Fimei holds in Recordati, will be reassigned to Rossini S.a.r.l. The end result is, therefore, that Rossini S.a.r.l. will simply hold all the shares currently held by Fimei -- or which will be held by Fimei prior to the merger, and all other shareholders will also continue to hold the number of shares that they held before the merger. So all shareholdings are unaffected. Turning on to Slide 4. As I said, this being a major transaction with the related party, it was assessed by the committee for transactions with related parties, which is wholly controlled by independent directors who issued their favorable binding opinion on the transaction. And specifically, the committee was called to assess the fairness of the exchange and the specific interest that Recordati had in pursuing the transaction. As referenced already and as mentioned, there is a tax benefit for the allowance for corporate equity, which will be transferred to Recordati S.p.A. As Andrea mentioned, this -- the accrued benefit by Rossini and that will be accrued up until the effective date of the merger is estimated to be worth EUR 12.9 million, and Recordati will enjoy a EUR 1.3 million annual recurring benefit [ in all ], EUR 1 million in 2021. The merger is conditional upon confirmation also by an independent appraiser, which will be appointed by the Court of Milan on the fairness of the exchange. It is subject to the Italian government not exercising its veto right under the Golden Power regulation that was recently extended in its reach to the pharmaceuticals sector in light of the COVID pandemic. And it's also, obviously, subject to, as said, the 2 merging entities being discharged of any and all obligations and liens resulting from the original acquisition of Fimei. And finally, that no material adverse changes would occur between now and effective date that could change any of the basic assumptions and the risk profile behind the -- assumed in the plan. And ultimately, as Andrea also said, that it is subject to shareholder approval. The -- it is also -- there is, as mentioned, no change in Recordati's articles association nor in the number of shares, which have been issued. The existing shareholders in Recordati S.p.A. are unaffected by the merger. There is no change in the net financial position strategy nor capital allocation policy of Recordati S.p.A. And also importantly, no impact on the financial statements of Recordati. As explained in more detail in the appendix, this being a transaction amongst entities under common control where the merging entities do not meet the definition of businesses, this will not fall under the application of IFRS 3. The merger will be accounted for from the perspective of Recordati as a surviving entity, which will recognize any assets or liabilities, which are transferred to book value with no pushdown accounting of any goodwill or assessment at fair value of any intangibles that may have arisen as a result of the original acquisition. So once again, Recordati's financial statements will remain substantially unaffected. And finally, alongside the merger plan, a merger agreement was entered into which provides customary representation and warranties on the part of Rossini Luxembourg S.a.r.l., which also makes and governs the interim management of the company between now and the effective date and in the litigation provisions in case of any breaches or changes to, vis-à-vis those representations and warranties, which are -- have been provided. And finally, on Slide #5, you will see a timetable of next steps. We aim by the 8th of October to publish the details of the merger plan and the information document, which will be made available to investors. The government -- Italian government has 45 days to express its either veto or conditions. We don't expect, frankly, any to apply as there was no effective change of control. We are waiting for the appointment of the expert by the Court of Milan, and we're expecting that expert to then be able to provide their opinion on the fairness of the exchange and the terms of the merger by the middle of November. Based on this time line that we expect the extraordinary shareholder meeting to be held in the middle of December. And with regards to then effective dates. And clearly, on February, the merging entities will finalize the financial statements, which will be the basis for any final residual dividends to pay out any net assets, which are in the company, again, net of any liabilities or debt. And immediately after the close on 31st of March, the deed of merger will be finalized in the early days of April with an effective date for accounting and tax purposes of April 1. With that, operator, I guess, we'll be opening up the call for questions.

Yes, operator, can you please start the Q&A session?

This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Jo Walton with Crédit Suisse.

Just a couple. Am I right in assuming that the timing of this announcement was effectively down to the tax authorities. Then this is something you had in mind, you needed to get the tax guidance so that you knew that you'd get the onetime gain and then the ongoing element. Now you've got that, you can put it in play? You say there'll be substantially no change to the costs. I mean presumably -- I mean, it's absolutely de minimis. So there should be, apart from the tax element, absolutely no change to our numbers. And finally, as we have both the CEO and the CFO, I wonder if you could just give us an update, anything that we should be mindful of that has happened in the third quarter.

Yes. You're absolutely right on the first 2, Jo. The timing is absolutely deriving from the receipt of the confirmation from Italian tax authorities of Rossini Investimenti's entitlement. To the credit, it was earlier -- it was received earlier this year. The procedure is a quite robust one that a transaction with a major related party goes through. And so we just took the due diligence in time to go through that, as I described, involving the independent directors and advisers. And in terms of impact on the Recordati's financial statement, absolutely will be de minimis. I mean I can't say 0 because there may be some residual assets, residual liabilities. But as I hopefully, I illustrated, the company, 2 holding companies, are pure holding companies with essentially nothing in them but the Recordati shareholding. I think we're going to ask you to be patient on Q3, Jo. We have nothing really to add versus what we said at Q2 and even Q1 in terms of the effects of the dynamics. So please bear with us until October 29 on that one.

And you will book this presumably then in the EUR 12.9 million exceptional gain? Or do you believe that this is part of your ongoing business, it will happen in 2Q next year, presumably?

No. We are -- this would be a nonrecurring, Jo. I think we've been very clear...

[indiscernible] booking.

Sorry. Oh, sorry, well, we have to -- first of all, we have to wait for the transaction to be approved, obviously. And therefore, we would book this once the merger takes place in 2021.

The next question is from KC Arikatla with Goldman Sachs.

You mentioned that there won't be any change to Recordati's financial position. Andrea, can you reassure investors at this stage that there is no plan for transferring the debt that CVC had taken to fund the acquisition on to Recordati's balance sheet some point in the future?

A simple word, yes, I can reassure you on this.

There is no plan.

There is no plan. There's no -- there's absolutely no plan, no risk that I see on that. Absolutely, absolutely 0.

The next question is from [ Marcos Bala ] with Morgan Stanley.

My questions have been [indiscernible] just to make clear for bondholders, I guess.

No. We can't hear you.

We're losing you. You're coming and going.

Hello? Can you hear me now?

Yes. Now we can hear you better. And no, we cannot again. You're coming and going.

Can you hear me now?

Yes. Let's try again. And otherwise, you may want to dial back in from a different line and we'll...

Apologies. My questions have been answered. Just wanted to follow up on one. For bondholders, I guess, there is no consent coming up. We don't have to vote on this transaction. It's all for the shareholders. Is that correct?

The bondholders do not have to vote on this transaction. I can't speak, honestly, for the bondholders. My understanding, though, as I said, is this potential shortening of the control chain in Italy was foreseen, both in the original NTA and in the own holder -- and whole prospects, and there's no change that I could see from a bondholder perspective. But again, we certainly will not be voting on the -- on this matter. But I don't see any change either.

[Operator Instructions] The next question is from Isacco Brambilla with Mediobanca.

Just a very quick one. Can you remind us which is the majority threshold to be achieved at the Extraordinary Shareholders' Meeting in December to approve the transaction?

Yes. It's 2/3 of shareholders attending the meeting.

2/3. Okay. Got it.

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

Great. Thank you very much, everybody, for connecting. Have a good day. Bye-bye.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.