Imperial College tech commercialisation group rejects takeover bid from IP Group

Touchstone Innovation, the quoted technology transfer specialist that commercialises research from Imperial College London and other leading universities, has rebuffed a merger proposal from its counterpart, IP Group.

However, with IP Group having the backing of the owners of 74.3 per cent of Touchstone shares, it is unlikely Touchstone, formerly known as Imperial Innovations, can hold out for long.

The deal would involve the combination of the two biggest seed funding investors in university intellectual property, creating a company with a diversified portfolio of spin-outs. IP Group is valued at around £800 million, Touchstone around £500 million.

IP Group said the merged company would be a global leader in university research commercialisation, with more scope for investment, a larger portfolio with assets across a range of sectors and stages of corporate development, and options on research from leading institutions.

The all-share offer values Touchstone shares at £3.07, based on IP Group’s closing share price of £1.43 on Monday. The implied value was slightly ahead of Touchstone’s closing share price of £2.94 on Monday.  When news of the offer broke on Tuesday the shares traded up to £3.09.

Underlining the scale of its ambition, IP Group also announced plans to raise £200 million in a rights issue and to launch a new subsidiary, IP Group Australia.

In its statement, Touchstone said it has engaged with IP Group, “Because the proposal has certain merits and because [our] large shareholders asked us to do so.”

However, an agreement on terms and governance of the merged company could not be agreed prior to the capital raise announced by IP Group on Tuesday, and the possible implications for its share price and therefore the value of the offer.

London Stock Exchange rules mean IP Group must either make a formal offer or withdraw by 20 June. Touchstone may hold out for better terms for now, but with its leading investors Woodford Investment Management, Invesco Asset Management and Lansdowne backing the deal, it is likely to go through.

As Imperial Innovations, Touchstone was the first university tech transfer operation to go public, joining the Alternative Investment Market in London in 2006. Since then it has invested £335.7 million in spin-outs and these companies have in turn raised £1.5 billion.

The value of Touchstone’s portfolio of 47 companies was £385.81 million at January 2017 and there was £163.3 million cash in hand, including a £50 million loan facility from the European Investment Bank.

The company took a big hit in June 2016 when the leading light of the portfolio, Circassia Pharmaceuticals – then the UK’s most valuable biotech – saw its lead allergy vaccine flop in phase III development. Shares in Circassia, in which Touchstone has a 9.3 holding, fell by 66 per cent.

IP Group formed its first partnership in 2000 with the chemistry department at Oxford University, and now has agreements with more than 15 of the UK’s leading research universities. In 2013, it branched out into the U.S., sealing technology commercialisation deals with Columbia, Princeton and the University of Pennsylvania.

In its most recent fundraising in March 2015 IP Group raised £128 million in an oversubscribed placing, enabling it to increase investments in its portfolio and to start-up companies based on research carried out at U.S. partner universities.

Apart from scale, the addition of Touchstone will bring more balance to IP Group’s investments, which are heavily weighted towards the Oxford University spin out Oxford Nanopore. Since investing in the seed round, IP Group has followed its investment through the large funding rounds Nanopore has needed to support its ambition of commercialising a novel gene sequencing technology, and still owns 19.6 per cent of the company.

At the same time as announcing the £200 million placing on Tuesday, IP Group also announced the launch of IP Group Australia, which has sealed commercialisation agreements with nine leading Australian and New Zealand research universities.