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Prescription drugs on shelves at a pharmacy in Montreal on March 11, 2021.Ryan Remiorz/The Canadian Press

The cost of prescription drugs may be high in Canada, but the price for a national pharmacy chain is cheap.

Shareholders of Neighbourly Pharmacy Ltd. NBLY-T are set to vote Friday on a plan to sell their stock to Montreal-based Persistence Capital Partners, which already owns half the company. The offer of $18.50 per share, plus a sliver of future profits, is 52.6 per cent above where Neighbourly shares traded before its offer became known, the company’s board highlights in the deal prospectus sent to stockholders.

It is, however, less than half of Neighbourly’s peak share price of more than $40, set a little over two years ago, and barely more than its May, 2021, initial public offering price.

And, importantly, it’s less than Neighbourly is likely currently worth – if you question a conveniently timed pessimistic forecast from management.

Neighbourly Pharmacy agrees to go-private offer from private-equity backer

Neighbourly is Canada’s third-largest national pharmacy operator. At the time of its IPO, it described itself as the country’s fastest-growing network of community pharmacies – and it has delivered on that promise, doubling from 145 locations to 293 in less than three years. Revenue has nearly tripled.

Alas, as an acquisition story – or “roll-up” – Neighbourly is also arguably a creature of a low-interest-rate environment. That’s an environment that no longer exists, as the Bank of Canada’s rates have ballooned since their March, 2020, low. Neighbourly’s annual interest costs have doubled since early 2021, and most of its debt metrics have been going in the wrong direction.

Perhaps understandably, investors have been unforgiving of young, leveraged growth stories. Neighbourly’s share price fell 60 per cent from its all-time high to below $16 in July, 2023.

That’s when Persistence Capital made its well-timed move. According to a narrative included in the prospectus, Stuart Elman, Persistence Capital’s managing partner – and chairman of the board of Neighbourly – started calling his fellow board members to sound them out on a sale. (Neither Persistence Capital, Mr. Elman nor Neighbourly responded to requests for comment.)

On July 31, Persistence Capital made a $20.50-per-share offer, a 28-per-cent premium on that day’s closing price. The normal procedures began, including the board’s independent directors hiring TD Securities to do financial analysis and offer a fairness opinion. By late September, TD told the board that its preliminary estimate, using a range of inputs and models, was that Neighbourly was worth $20.50 to $25.50 per share, neatly capturing the Persistence Capital offer at the low end. The board told Mr. Elman the midpoint, $23, would suffice.

But Neighbourly’s share price had dropped, to the $12-to-$13 range, and Persistence Capital wouldn’t budge. On Oct. 3, the company announced a deal at $20.50.

That wasn’t the end of it, though. In December, Mr. Elman told Neighbourly that, in consultation with its funding partner, Brookfield Corp. BN-T, Persistence Capital was considering reducing its offer. On Dec. 10, Neighbourly’s directors said that was a no-go.

But five days later, Neighbourly’s chief executive officer, Skip Bourdo, provided the company’s board with an updated financial forecast, calling for lower same-store revenue growth, higher corporate costs and fewer store acquisitions. Two days later, Mr. Elman cut Persistence Capital’s offer to $18.50 per share. The next day, the company revealed the lower offer but did not disclose that a revised financial forecast was at the core of it.

After much back and forth, Neighbourly’s board extracted an additional profit-contingent payment of a possible 61 cents per share, and TD issued a new opinion: The stock’s value was in the range of $18.50 to $23.50 per share, once again neatly capturing Persistence Capital’s offer at the low end. Neighbourly’s board agreed to the deal and announced the revised agreement on Jan. 15. (TD spokesperson Erin Sufrin declined to comment on a client matter.)

An analyst who is speaking out is Kathleen Wong at Veritas Investment Research, who believes “the minority shareholders basically got screwed.”

She is skeptical of management’s forecasts and TD’s modelling, particularly by its use of the current year’s EBITDA, or earnings before interest, taxes, depreciation and amortization, as a base. She believes earnings were depressed by a postpandemic labour shortage and should increase as Neighbourly delivers on the cost cutting it had already announced, including synergies from buying its single-biggest competitor in 2022. Adjusting the EBITDA number upward, she boosts the valuation range by $3 to $5 per share.

But to Ms. Wong, this is a long-term story, a case where the initial sales pitch from management rings true. She says that when Neighbourly said it had identified 3,500 pharmacies that met its acquisition criteria, she double-checked and found it to be true. “This is a huge growth story. Think about it – they have been buying 35 pharmacies a year, and there are 3,500 out there.”

Absent an unexpected shareholder revolution at the end of this week, that growth story will be solely in the hands of Persistence Capital. In recommending the offer, Neighbourly’s board acknowledged “limited alternatives.”

Specifically, the company couldn’t shop for higher offers. Persistence Capital said it wasn’t interested in selling its stake to anyone else, perhaps because it sees just how valuable Neighbourly could be.

“The principal alternative” to selling Neighbourly to Persistence Capital, the board said in the deal prospectus, is “maintaining the status quo and executing the corporation’s current strategic plan.” It’s a shame Neighbourly’s current public shareholders will be squeezed out of seeing that happen.

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