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Wednesday, 20 August 2014

KISS

Hostile drug deal gets too clever for its own good

Royalty Pharma is suffering from some self-inflicted wounds in its hostile pursuit of Elan. The finance firm tried to use the drug maker’s $1 billion stock buyback to swoop up the entire company. But it devised a puzzlingly complex tender offer that was too clever for its own good. The scheme ended up replacing a long-term shareholder with other investors far more likely to demand a chunkier premium.

Elan is largely a cash shell after selling most of its share in multiple sclerosis drug Tysabri earlier this year for $3.25 billion. Royalty lobbed in a $6.6 billion bid, or $11 a share, in February. Elan’s decision to buy back $1 billion of stock and return 20 percent of its remaining royalties from the drug to shareholders helped push the stock above the offer price.

Elan chose what’s known as a reverse Dutch auction for the buyback, offering $13 a share and then going lower until enough investors bit. Royalty responded with a revised, complicated bid: if the investors settled on $11.75 to $12 a share in the auction, Royalty would offer $12 a share for the entire company. If the strike price was more than $12.25, it would pay $11. If it was lower than $11.75, it would offer less on a sliding scale.

The offer contained both carrot and stick, signaling that Royalty would pay up to $12 but not more. Royalty added yet another tweak by saying it would hold back $1 a share off the offer price until after winning the company if Elan refused to reveal the size of its cash hoard.

Few shareholders were willing to sell for less than $13, aside from large stakeholder Johnson & Johnson - it wanted out, but was not too price-sensitive. It represented 92 percent of the shares tendered at the strike price of $11.25. J&J isn’t talking, but its actions imply it thought Royalty’s bid either contained too many conditions or the finance firm wouldn’t raise the price sufficiently to succeed.

Now Royalty’s offer is below Elan’s market price of $11.90 and getting its hands on the company is likely to require paying a fair whack more than what seemed to be its $12-a-share maximum. That’s a poor advertisement for complexity.

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Context News

On April 18 Elan announced the results of a $1 billion Dutch auction share repurchase announced on Feb. 22. The strike price was $11.25 a share and will result in the retirement of 14.8 percent of outstanding shares. Of the 116 million shares tendered at the strike price, 107 million (92.3 percent) were offered by former corporate partner Johnson & Johnson.

Royalty Pharma, a financing firm specializing in life sciences, announced a revised bid for Elan on April 15, urging shareholders to tender their shares at $11.75 to $12. In the new offer, Royalty offered: $12 if the strike price of the Dutch auction was $11.75 to $12; $11.50 if the price was $11.50; $11.25 if the price was $11.25; $11 if the price was $11; and $11 if the price was between $12.25 and $13.

In addition, if Elan refused to verify its net cash position, Royalty’s offer would be reduced by $1 a share and investors would receive a right to receive up to $1 depending on Elan’s cash position.

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