DEF: Better Choice Company to Acquire SRx Health Solutions in All-Stock Deal

Better Choice Company Inc. will acquire SRx Health Solutions Inc. in an all-stock transaction, pending shareholder and regulatory approvals.

Summary

• Better Choice Company Inc. is set to acquire SRx Health Solutions Inc. through an all-stock transaction.
• The deal involves Better Choice issuing up to 30 million shares of its common stock.
• SRx shareholders will have the option to receive either Better Choice shares or exchangeable shares.
• The exchange ratio will be determined based on a 30-day volume-weighted average price (VWAP) of Better Choice shares, subject to a collar of 19.75 million to 30 million shares.
• The transaction values SRx at approximately $77 million, assuming net debt of $43 million, subject to adjustments.
• Following the acquisition, SRx will operate as an indirect subsidiary of Better Choice.
• The combined company will focus on leveraging operational synergies and growth strategies across both businesses.
• The Better Choice board has unanimously approved the transaction and recommends that stockholders vote in favor of the deal.
• The transaction is subject to various conditions, including shareholder and regulatory approvals.

Sentiment

Score: 5

Explanation: The document is a formal proxy statement, so the sentiment is neutral. While the deal is presented as beneficial, there are significant risks and uncertainties outlined, which tempers any positive sentiment.

Positives

• The acquisition provides SRx with access to the U.S. capital market.
• The combined company will focus on leveraging operational synergies.
• The deal is expected to implement growth strategies across both businesses.
• The Better Choice board has unanimously approved the transaction.
• The transaction is supported by a fairness opinion from Strategic Capital Advisors, Ltd.

Negatives

• The transaction is subject to various conditions, including shareholder and regulatory approvals.
• The exchange ratio is not fixed and will be determined closer to the closing date.
• The combined company will operate two distinct businesses which may cause a distraction to the operation or success of the current business of Better Choice.

Risks

• The Arrangement may not be completed due to failure to obtain the necessary court and/or regulatory approvals.
• Uncertainty surrounding the Arrangement could adversely affect Better Choices retention of strategic partners and personnel and could negatively impact Better Choices future business and operations.
• The Parties could fail to complete the Arrangement or the Arrangement may be completed on different terms.
• The Termination Payment, if triggered and the terms of the Voting and Support Agreement, may discourage other parties from attempting to acquire Better Choice.
• Better Choice will incur substantial transaction-related costs in connection with the Arrangement even if the Arrangement is not completed.
• While the Arrangement is pending, Better Choice is restricted from taking certain actions.
• The pending Arrangement may divert the attention of Better Choices management.
• Following the completion of the Arrangement, the Combined Company may issue additional securities.
• SRx conducts its business in a highly regulated industry and environment.
• Changes in reimbursement programs, prescription drug pricing and commercial terms could adversely affect SRxs operations and financial performance.
• SRxs business is highly competitive and SRx may not be able to compete successfully against current and future competitors.
• SRxs business is impacted by the interplay between brand name and generic drugs.
• Changes in drug development and prescription mix may impact SRxs results of operation.
• Product liability, product recall or personal injury issues could damage SRxs reputation and have a significant adverse effect on SRxs business, operating results, cash flows and/or financial condition.
• The drug products that SRx carries have a set shelf life.
• Continued operation of SRxs distribution facilities is critical to SRxs operations.
• Risks related to owning real estate.
• Conducting clinical trials involve a high degree of risk.
• There may be delays or stoppages in SRxs clinical trials due to circumstances beyond SRxs control.
• Negative results from clinical trials or studies of others and adverse safety events involving the targets of SRxs products may have an adverse impact on SRxs future commercialization efforts.
• SRxs insurance policies may not be sufficient to cover all claims.
• SRx is subject to a variety of business continuity hazards and risks, any of which could interrupt SRxs operations or otherwise adversely affect its performance and operating results.
• SRxs risk management policies and procedures may not be fully effective in mitigating SRxs risk exposure in all market environments or against all types of risks, which could expose SRx to losses and liability and otherwise harm SRxs business.
• Consumer opinion of SRx may be impacted in case of reputational damages to SRxs suppliers.
• Healthcare professional errors may harm SRxs business and reputation.
• Consolidation in the supply chain may negatively impact drug prices and SRxs ability to compete.
• SRx relies on third-party suppliers for a significant portion of its supply of products.
• SRxs quarterly results of operations may fluctuate and, as a result, SRx may fail to meet or exceed the expectations of investors or securities analysts which could cause SRxs share price to decline.
• Change in tax and trade policies, tariffs and other government regulations affecting trade between Canada and other countries could adversely affect SRx.
• Disruption of the global supply chain and ineffective service providers could adversely impact SRxs business.
• Failure to meet customer expectations may harm SRxs brand and reputation, its ability to retain and grow its customer base and its operating results.
• If SRx cannot keep pace with rapid developments in healthcare technology and change in SRxs industry and continue to grow its patient base, the use of SRxs services could decline, reducing SRxs revenue.
• SRxs use and disclosure of personally identifiable information, including personal health information, is subject to privacy and security regulations.
• SRx relies on the relationships that SRx has established with major drug manufacturers and specialty practitioners to conduct SRxs business, and changes to these relationships may impair SRxs operations.
• SRx may be subject to information technology systems impairment and cyber-attacks in the future.
• SRxs services must integrate and interoperate with a variety of operating systems, software, hardware, web browsers and networks.
• Failure to properly manage inventories and anticipate demand may impact SRxs financial performance.
• Reliance on data obtained from third party sources.
• Change in population demographics could have an adverse effect on SRxs business, operations, financial condition and results of operations.
• If SRx is unable to hire, retain and motivate qualified personnel, its business will suffer.
• SRx is dependent on the continued services and performance of SRxs senior management and other key employees, the loss of any of whom could adversely affect SRxs business, operating results and financial condition.
• From time to time, SRx may become defendants in legal proceedings as to which SRx is unable to assess its exposure, and which could become significant liabilities in the event of an adverse judgment.
• Labor-related matters, including labor disputes, may adversely affect SRxs operations.
• Goodwill and other intangible assets could, in the future, become impaired.
• Conflicts of interest may arise between SRx and its directors and officers as a result of other business activities undertaken by such individuals.
• SRx is subject to risks associated with leasing space and equipment and is subject to a number of long-term non-cancelable leases with substantial lease payments.
• SRx may be unable to adequately protect its proprietary and intellectual property rights.
• SRx may be accused of infringing intellectual property rights of others.
• The costs and effects of pending and future litigation, investigations or similar matters, or adverse facts and developments related thereto, could materially affect SRxs business, financial position and results of operations.
• SRx is heavily reliant on its healthcare professionals, and SRxs success depends on the satisfactory performance by its healthcare professionals of their professional obligations including maintenance of their required qualifications.
• SRx may become involved in regulatory or agency proceedings, investigations and audits.
• SRx may also become party to litigation from time to time in the ordinary course of business which could adversely affect its business.
• The impact of economic conditions, including the resulting effect on spending by consumers, may adversely affect SRxs business, operating results and financial condition.
• SRx may not be able to successfully implement SRxs growth strategy.
• SRx has experienced significant growth in recent periods, which puts strain on its business, operations and employees.
• A portion of SRxs growth depends on SRxs ability to complete future acquisitions, and failure to do so in a timely manner, or on less favourable terms to SRx, could impede SRxs ability to execute portions of SRxs business strategy.
• SRx may be unable to adequately protect its proprietary and intellectual property rights.
• SRx may be accused of infringing intellectual property rights of others.
• The costs and effects of pending and future litigation, investigations or similar matters, or adverse facts and developments related thereto, could materially affect SRxs business, financial position and results of operations.
• Competition for acquisition candidates, consolidation within the pharmacy industry and economic and market conditions may limit SRxs ability to grow through acquisitions.
• Changes in the Canadian healthcare industry and regulatory environment could negatively affect SRxs growth and financial projections.

Future Outlook

The combined company will focus on leveraging operational synergies, including infrastructure and distribution, and implementing growth strategies across both businesses to launch into new verticals and geographies.

Management Comments

• The Better Choice Board has unanimously concluded that the Arrangement is in the best interests of Better Choice and its stockholders and has approved and authorized the Arrangement.
• The Better Choice Board unanimously recommends that the stockholders vote FOR (1) the Name Change Proposal, (2) the Arrangement Proposal, (36) the Plan Proposal and (4) the Adjournment Proposal.

Industry Context

The Canadian pharmacy sector is characterized by a unique balance of growth and stability underpinned by the markets exposure to favorable secular trends and the essential nature of the goods and services it provides. The specialty pharmacy sub-sector has experienced significant growth in recent years with growth of specialty drug spend reaching +9.7% from 2018 2022 and outpacing that of traditional drugs at +7.1% over the same period.

Comparison to Industry Standards

• Based on SCAs conversations with SRxs management and analysis of SRxs financials, the total implied enterprise value of the consideration is equivalent to approximately 0.37x 2025E Revenue and 6.20x 2025E EBITDA, respectively.
• By comparison, the two nearest public comparisons SCA identified (CRRX.CN and GRDN.US) trade at an average of 0.93x 2025E Revenue and 7.05x 2025E EBITDA.
• The average transaction multiple of three precedent transactions SCA deemed to be most relevant (Shoppers in 2013, Rexall in 2016, and Neighbourly in 2024), was over 20x EBITDA.

Management Changes

Legal Proceedings

• On December 17, 2022, SRx was subject to discipline from the Saskatchewan College of Pharmacy Professionals due to improper billing practices. The regulator required SRx to pay a fine of CAD$30,000.00, to repay the CAD$73,795.40 that had been overbilled, and to reimburse the regulators investigation costs of CAD$25,875.00.

Related Party Transactions

• SRxs related party transactions include transactions its key management, personnel, majority shareholders and affiliated entities.
• In the normal course of operations, SRx enters into various transactions with related parties that are measured at the agreed-upon exchange amount.
• SRx, through its wholesale and distribution entity, ConnectRx Inc., sells and distributes certain pharmaceuticals to associated entities.

Stakeholder Impact

• Existing Better Choice stockholders will experience significant dilution, owning approximately 8% of the combined company.
• SRx shareholders will own approximately 87% of the combined company.
• The combined company will continue to operate its portfolio of established premium and super-premium pet products under the Halo brand and its large specialty pharmacy network in Canada under the SRx brand.
• The Combined Company affords the SRx business with access to the U.S. capital market and will focus on leveraging operational synergies, including infrastructure and distribution, and implementing growth strategies across both businesses to launch into new verticals and geographies.

Next Steps

• Better Choice stockholders will vote on the proposed transaction at a special meeting on February 19, 2025.
• SRx shareholders will vote on the proposed transaction at a special meeting.
• The companies will seek regulatory approvals for the transaction.
• The companies will work to satisfy all conditions precedent to the completion of the Arrangement.

Key Dates

Keywords

acquisition, merger, pharmacy, healthcare, specialty drugs, stock transaction, shareholders, regulatory approvals, exchangeable shares, business combination