Quick Pitch: NIOX Group (NIOX:L)

Merger Arb — 9% upside (at 74.2p/share)

Another potential buyout in UK with a non-binding offer—a bunch of these have been covered on SSI lately (e.g. RWI, EQLS, TIFS, LTG, DLG, NWOR), and all of them have played out the same way: definitive agreement was signed, and the spread disappeared or narrowed substantially right away.

But NIOX also has an additional kicker – management had already been running a limited ‘private sale process’, when the current unsolicited offer came in. So there is a small chance that other parties will be interested in NIOX as well.

Last week, asthma diagnostics firm NIOX Group received a non-binding takeover proposal from Keensight Capital at 81p/share (9% spread). This follows an approach at 78p from the same bidder last month. Management said it’s ‘minded to recommend’ the latest offer and has granted access to due diligence. The put-up-or-shut-up deadline is April 17.

Management also disclosed that it had already been quietly running a limited ‘private sale process’, reaching out to a handful of potential buyers. Negotiations with them are still ongoing. Keensight’s bid was described as ‘unsolicited’, so it seems that it wasn’t one of those initially contacted parties. That leaves the door open for a competing bidder to step in. But even if no rival bid emerges, a sale to Keensight seems likely. The downside to pre-announcement levels is ~18%. However, even if the current bid flops, I’d be surprised to see the stock drop all the way back given that the sale process has been made public.

Management has already blessed the latest bid, and it looks like shareholders will be happy to take it as well. About six months ago, NIOX ran a tender offer at 80p for 6% of its outstanding shares. It ended up massively oversubscribed, with 74% of all shares participating. It was noted that three largest shareholders have also participated in the tender: Harwood Capital (17.6% stake), AstraZeneca (16.6%) and Richard Griffiths (8.8%). Harwood Capital has a representative on the board, so it’s fair to assume it supports the current bid. AstraZeneca received its stake through a licensing agreement with NIOX back in 2017. That partnership failed/ended in 2020, and AZN has been sitting on the shares ever since, likely waiting for an exit opportunity like this. Richard Griffiths is a UK investor, who used to finance NIOX many years ago and once owned around 30% of the company. Following the fallout with AZN, he has slowly and gradually sold down his position to the current 8.8%. Most of his sales last year and this year have been in the 68–74p range, so it’s safe to assume he’d be happy to exit at 81p. Rathbones Group, the fourth-largest shareholder with 8.6% stake, has also sold a tiny amount at 74p this week.

So from the target company’s side, everyone appears willing to see the sale go through. Management looks competent, and the executive chairman has prior experience with successful exits—he sold a company he founded back in 2006.

The key question is whether Keensight will commit to a binding agreement. Keensight is a European PE fund focused on technology and healthcare. The fund’s stated strategy is to back ‘highly profitable, fast-growing leaders in niche segment’. NIOX ticks all of the boxes and seems like a very fitting addition to the portfolio.

NIOX is a pioneer in fractional exhaled nitric oxide (FeNO) testing—a reliable, non-invasive way to detect airway inflammation and asthma. Its core product, NIOX Vero, is a compact, portable device that measures nitric oxide levels in a patient’s breath. It’s a classic blades-and-razor business model with outsourced manufacturing (asset light) and 90% recurring revenues from disposable testing parts. The company has delivered a consistent 15% revenue CAGR over the past four years, became EBITDA-positive in 2021, and last year reported £14m in EBITDA at 33% margin. So it’s profitable, fast growing and has a very specific niche.

At first glance, the 81p/share bid doesn’t look particularly cheap, coming at 7x TTM sales and 24x TTM adjusted EBITDA. However, these kind of valuation multiples are rather standard for businesses of this profile (blade-and-razor model, 30%+ EBITDA margins, teen-level growth, and 90% recurring revenues). NIOX has been trading at similar levels over the last 3 years. There aren’t any perfect comps, but:

• Similar blade-and-razor medtech companies in the US, such as DXCM (continuous glucose monitors + disposable sensors), PODD (insulin pumps + disposable pods), and ISRG (robotic surgery systems + disposable instruments) are all trading at 30x+ EBITDA multiples.
• RMD, a somewhat similar peer in the UK, which manufactures sleep apnea monitoring devices with disposable masks and tools, trades at 18x EBITDA.
• NIOX acquired Aerocrine (developer of the world’s first nitrogen monoxide test for asthma) at 8.7x sales in 2015. Aerocrine’s co-founder works as NIOX’s scientific advisor to the board.

The valuation seems even more justifiable given that NIOX is on the verge of refreshing its aging product line, which could boost growth even further. The company’s flagship device, NIOX Vero, has been on the market since 2013 and has powered over 55 million tests—but there haven’t been any new product launches in a decade. That’s set to change this year with the release of NIOX Pro, a more affordable, next-generation version. Looking further ahead, NIOX also plans to roll out NIOX MyNo, a home-use device for asthma monitoring and management.

Keensight is a very sophisticated player with a strong track record—18% average portfolio growth over the past five years, and a 39% IRR across 50 exits. It’s clearly not just buying random stuff, so I wouldn’t be surprised if there was a strategic angle to this transaction. Keensight manages around £5.5bn, having raised €3bn in 2023. A potential acquisition of NIOX would represent only about 6% of their AUM, which makes financing a non-issue.

One interesting company in Keensight’s portfolio is Inke (fully owned), which manufactures micronized active drug ingredients used in inhalers. Around 50% of its portfolio is focused on asthma. This adds a potential cross selling opportunities and a strategic layer to the NIOX acquisition. Of course, all of that is just a speculation on my side. Maybe Keensight simply thinks NIOX is a good investment as a standalone company at the offered price.

All in all, the setup looks pretty interesting as a short-term play on emergence of a competing bidder or signing of binding agreement with Keensight.