The Health Care M&A Monthly FEB 2004 pg2

	The Health Care M&A Monthly
In the February 2004 issue: O La La: Sanofi Launches Hostile Bid for Aventis Worth $61 Billion (con't) The Players Sanofi-Synthélabo took shape under the leadership of CEO Jean-François Dehecq. In the late 1960s, M. Dehecq joined the French oil company Elf Aquitaine, SA. As part of a move to diversify its chemicals business, in 1973 the company enlisted M. Dehecq to help it create Elf’s Sanofi unit. After a flurry of deals (300 by some counts) in such diverse areas as cosmetics, drugs and food additives, he found his core business, pharmaceuticals. He bought a prescription drug business from Eastman Kodak’s (NYSE: EK) pharmaceutical division, and began a development pact with Bristol-Myers Squibb (NYSE: BMY). The late 1990s saw Sanofi narrow its strategic focus to the prescription drug market, selling off cosmetics, veterinary products and diagnostics. This self-reinvention ultimately led to the acquisition of French rival Synthélabo, SA, a listing on the Paris bourse and headquarters in the City of Light. Among SNY’s large stockholders are the French oil company Total (PA: TOTF), with 24.4% of the stock, and cosmetics firm L’Oréal (PA: OREP), with 19.5%. SNY’s brands include the anti-stroke drug Plavix and the Ambien sleeping pill. On a trailing 12-month basis, SNY generated revenue of $10.4 billion, EBITDA of $3.72 billion and net income of $2.2 billion. In terms of revenue, SNY is the fifteenth largest pure-play pharmaceuticals company. Currently based in Strasbourg, France, Aventis is the product of a 1999 merger between French pharmaceutical company Rhône-Poulenc Rorer and Germany’s chemical and drug company Hoechst. Currently the world’s fifth largest pure-play pharma company, AVE concentrates on prescription drugs and vaccines: its best known drugs include the allergy pill Allegra and the blood-clotting drug Lovenox. Often billed as a Franco-German concern, only 22% of AVE’s shares are held in France. Other stakes are held offshore: AVE’s largest shareholder, Kuwait Petroleum Corporation, holds 13.5% of shares and 13.6% of voting rights. On a trailing 12-month basis, AVE generated $22.4 billion in revenue, $5.2 billion in EBITDA and $1.97 billion in net income. The Deal Under terms of the deal, AVE shareholders would receive five SNY shares and €69 in cash ($87.60) for every six AVE shares they hold. Or, more simply, AVE shareholders would receive 0.8333 shares of SNY common stock and €11.50 for each AVE share they hold. In effect, AVE shareholders are to receive 81% of the consideration in stock and 19% in cash. Based on stock prices of the two companies the day before the offer, this deal values AVE at €47.8 billion, or $60.9 billion. Sanofi is being advised by BNP Paribas and Merrill Lynch. In response, AVE has enlisted three advisors to help it scuttle the proposal: Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MWD) and Rothschild. This transaction offers AVE shareholders a wispy 3.6% premium over the stock’s prior-day trading price, and a 15.2% premium over the previous month’s average closing price. Sanofi says that, in its role as third largest pharmaceutical company, the combined concern would generate revenue of €21.6 billion and synergies of €1.6 billion. So what’s not to like? First, the price to revenue (P/R) multiple of 2.7x is a bit stingy (the price to EBITDA ratio of 11.67x is no great shakes, either). Based on a survey of 400 pharma deals over the past five years, the average P/R multiple for deals $1 billion and greater is 6.07x, the median 4.77x. Given these figures, AVE may just feel they’re getting stiffed. In fact, AVE’s CEO was so underwhelmed that in order to characterize the deal, he lapsed from French into English, calling it a "hold up." Au Contraire, Mon Ami Aventis’ board and management moved swiftly to turn down the offer. Not only did they find the measly 3.6% premium "uninteresting," they suspected that SNY is really looking to acquire AVE as a way to absorb the risk that the Paris-based company faces from patent challenges. In particular, SNY wants to take out some insurance against the likelihood that the courts will approve Dr. Reddy Laboratories’ (NYSE: RDY) challenge to produce a generic version of SNY’s big revenue maker, the blood-thinner Plavix. Buying larger AVE would help spread that risk around. Now, AVE is itself no stranger to the threat of generic competition; two generic makers are challenging its patent on Lovenox. However, a number of analysts contend that AVE’s stock, as currently priced, already factors in patent risk while SNY’s price seems not to reflect the pending patent challenges. (Perhaps the fact that 46% of SNY’s 1.38 billion shares is held by insiders may have contributed to insulating the company’s share price, temporarily at least.) SNY counters, claiming that AVE’s stock has been held back by other factors, and would soar aloft if only the boys in Strasbourg accepted their proposal and their management. In any event, at the time of the offer, the two companies had about the same size market cap, but SNY had barely one-half of AVE’s revenue. Apart from stroking its CEO’s ego, why would Sanofi take on a company twice its size? Some industry observers note that Sanofi went on the offensive in part to fend off unwanted bids on Sanofi itself. Nor is the timing entirely random. Sanofi has a binding shareholder pact with its two largest shareholders, Total and L’Oréal, which expires in early December, opening a window of opportunity for possible pharmaceutical predators of its own. The hostile bid is also designed to avoid prolonged talks which might leave the merger open to speculation and counterbidding. AVE’s attempt to fend off SNY’s bid includes finding a white knight. However, the usual suspects, including GlaxoSmithKline, Eli Lilly (NYSE: LLY), Roche Holding (SWX: ROCZ), Novartis AG (NYSE: NVS) and Wyeth (NYSE: WYE), have all demurred. More recently, Johnson & Johnson (NYSE: JNJ) has been mentioned. Moreover, AVE is also prepared to spin off certain business segments in an attempt to bolster its own stock price and open the gap between that price and SNY’s offer, hobbling or eliminating the premium altogether. AVE appears already to have held discussions with the U.S.-based equity firm The Blackstone Group and some others over the possible sale of its lower-margin OTC drugs business. Après Nous, Le Déluge. On February 17, the French Financial Markets Authority posted SNY’s offering on its website. For the proposal to become effective, SNY must receive 50% of shares and voting rights of AVE; the Federal Trade Commission (ours) must approve the deal; and SNY shareholders must also vote in favor of the deal. And all this must take place by April 27. SNY is trying an end-run around AVE by meeting with its largest shareholder, Kuwait Petroleum. And the rest of big pharma is trying to determine what the landscape would look like if such a deal went through. So they are drawing up their contingency plans to shore up market share and define their niches. Such plans will likely include a number of acquisitions and divestments throughout Europe. AVE believes that SNY would have to increase its premium to the range of 40% to 50% to reflect the value latent in its stock. SNY envisages no markup at all. So it will be a long and loud struggle.
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