The Health Care M&A Monthly: One Target, Two Buyers
We have recently seen a spate of deals with buyer and seller plodding through due diligence toward completion only to be caught off guard by an interloper intent on snagging the target for himself. A new offer is made, generally with better terms, that bumps the original buyer out of the picture.
This "mini-trend" is due in part to the abundance of capital available in the market for making acquisitions, and is best exemplified in the Long-Term Care sector where many dollars chasing few quality targets have pushed multiples to heady, near-historic highs. As part of this mind- set, the ready availability of funds has emboldened some buyers to pursue certain targets, even after another buyer had previously staked a claim.
At the risk of turning our reporting on Johnson & Johnson (NYSE: JNJ) and Guidant Corp. (NYSE: GDT) into a cottage industry, we note a serious wrinkle in JNJ’s plan to buy GDT for the renegotiated price of $21.5 billion (detailed in last month’s issue). Boston Scientific (NYSE: BSX) has now entered the fray with a counterproposal to buy Guidant for $25.0 billion.
Under terms of its proposal, BSX is offering to pay $72 per share for Guidant, half in cash and half in shares of its stock. This price represents a 14% premium to JNJ’s revised offer. BSX would be paying 6.76x revenue and 25x EBITDA, while JNJ would pay 5.8x revenue and 21.5x EBITDA. Taking into account GDT’s $2.5 billion in cash on hand lowers BSX’s effective price to $22.5 million (it would lower JNJ’s to $19.0 billion).
In a gutsy move for BSX, this deal would create a major player in the cardiovascular medical device industry. To overcome potential antitrust objections, BSX has already anticipated that it may have to divest GDT’s vascular intervention and endovascular business. But this would give BSX a onetime bump in revenue and reduce the effective purchase price by perhaps another $3 billion.
Johnson & Johnson could lose this one. Its aggressive pursuit of a lower price in recent negotiations may have alienated GDT’s board and shareholders, disposing them to favor BSX’s offer. That zeal may also have helped paint JNJ into a corner; to raise its bid in light of the BSX offer would probably be viewed unfavorably in the market, where JNJ wants to preserve its reputation for disciplined management and bargaining. Stay tuned for developments.
Realignment in the Cosmetic Industry
A second upstaging took place in the Medical Device sector this month. Allergan (NYSE: AGN) sensed a loss of nerve on the part of Medicis (NYSE: MRX) to carry through with its $2.8 billion purchase of Inamed (NASDAQ: IMDC), first proposed in March 2005, and stepped in with a superior offer of $3.2 billion.
AGN develops and commercializes pharmaceutical products for the ophthalmic, neurological, dermatological and other markets while IMDC manufactures breast implants, dermal products and obesity treatments.
Under terms of the deal, AGN has agreed to pay $84 in cash or 0.8498 shares of AGN common stock for each share of IMDC stock. The final consideration is to consist of 55% stock and 45% cash. This price yields a price to revenue multiple of 7.5x revenue.
This transaction would unite two California companies and create a major player in cosmetic medicine, uniting AGN’s Botox franchise with IMDC’s implants.
A week after AGN’s announcement, MRX walked away with a $90 million breakup fee, and, perhaps, into the arms of another company. At about the same time AGN made its peremptory bid for IMDC, Mentor (NYSE: MNT), another manufacturer of cosmetic implants, made an all-stock bid for MRX worth $2.2 billion, or a 25% premium to the stock’s prior-day trading price.
Still focused on buying Inamed, MRX initially rebuffed that bid, but now that it has conceded IMDC to AGN, it may want to revisit MNT’s offer, but on revised terms. It is true that Mentor’s stock has risen 85% in the past year on the expectation that the government will once again approve the use of silicone-gel breast implants. But on the theory that what goes up can also come down, investors are often leery of sharp changes in stock price. However, if MNT restructures its proposal to include a cash component—something it has said it is willing to do—it could entice IMDC into a merger. After all, both companies will have to contend with an enlarged AGN in the marketplace.
Beverly’s Third Buyer This Year
Readers will recall that in February a group led by Formation Capital made a bid for long-term care operator Beverly Enterprises (NYSE: BEV), offering $11.50 per share. Beverly’s board didn’t like the price or the idea of a hostile takeover, but once the company was in play, the board cast about for other buyers to save it from Formation, or worse. A bidding war ensued racheting up the price for BEV and by September, BEV’s board found what they thought was a suitable buyer in North American Senior Care (NASC), who offered $13.00 per share.
Alas, it was not meant to be. Apparently, NASC couldn’t nail down all the financing, and in stepped Fillmore Strategic Partners, an affiliate of San Francisco-based private equity firm Fillmore Capital Partners, LLC. Fillmore had been involved in NASC’s original funding syndicate, but now emerged as the buyer, offering $12.50 per share, which is less, it should be said, than the $12.90 per share that Formation had bid at one time.
Adding in the assumed debt, Fillmore is paying $1.8 billion for Beverly, which works out to 0.82x revenue and 7.6x EBITDA. Of the three deals discussed in this column, this may be the most unsatisfactory. The board’s reticence to take Formation’s deal seriously resulted in bidding the price so high that almost any buyer will be forced to sell off assets (think hospice) to fund the deal; even then, there will be little untapped value left to squeeze out of the skilled nursing business. In the final analysis, Beverly’s shareholders are the ones who are getting burned because the board appears not to have been able to accurately value the company or to distinguish viable from unviable buyers.
This exuberance in the current M&A market appears to be less "irrational" than was encountered in the run-up to 2000 which, among other things, saw the dot-com bubble swell and burst. Even though corporate egos may be involved in a few instances, the majority of buyers appear to have good strategic or operational reasons for taking up a specific deal. Given this healthy outlook, we expect M&A activity to continue apace into the New Year.