Accept Sanofi’s CZK 1,050 per share offer for Zentiva - Patria/KBC´s view

Czech investment group PPF has announced that it has no intention to lift its CZK 950 per share public bid for Zentiva NV shares above Sanofi’s CZK 1,050 per share offer, putting an end to speculation of a further bidding war for Zentiva. As a result, we would recommend shareholders to accept Sanofi’s public offer, conditional on obtaining at least a 50% stake in the firm and valid until 19 September 2008. In our opinion, Sanofi’s bid implies a rich valuation and offers a decent premium to exiting shareholders. Sanofi’s bid implies a 12M trailing EV/EBITDA of 15.3x, 15% more than the average of recent M&A deals in the region at 13.3x. We believe there is very little chance for a third bidder stepping in, as Sanofi, already has a relatively large 24.9% stake, it would probably not sell. As PPF declared it would not raise its bid, it has entered a 12-month blackout period. Since the chance for a further bidding war has now almost fully disappeared, we have lowered our expectation for the takeover premium we believe shareholders are likely to obtain. As a result, we cut our fair value estimate to CZK 1,050 per share, which is still situated 19.2% above our DCF-based valuation of CZK 881 per share.

• Confidence in management rebuilding slowly: Zentiva’s aggressive growth strategy in Romania has led to an excessive build-up of stocks and lower payment discipline. Lacking any warning from management, these developments led to the disappointment of investors. In our view, transparency has improved recently, as the company has provided details on the excess stock sold to wholesalers and also elaborated on the level of overdue claims. Despite this, we only expect confidence to be restored gradually.

• No major positive share price trigger on the horizon: We believe upcoming 2Q08 results are likely to be share price neutral, as we expect the strong CZK to continue to weigh on margins. Upcoming drug market protectionism measures in Russia may also have an adverse impact on Zentiva. We suspect Zentiva might further increase its provisioning in Romania on overdue claims rather than releasing provisions it has created in the previous quarters. Moreover, due to upcoming general elections in the country, the FX adjustment for reimbursed drugs suffers further delay and is unlikely to happen before the beginning of next year, in our view.

• Stretched valuation: Zentiva currently trades at a 2008F P/E of 23.7x, implying a 77.5% premium to the CEE3 peers’ average of 13.3x, as well as a 2008F EV/EBITDA of 11.6x, a 30% premium to the CEE3 average of 9.0x. This is a stretched valuation, in our view, which already reflects a substantial takeover premium, helped by the fact that there is limited number of available generic targets in the CEE region.