Several months of guessing ended this month when Mylan Laboratories (NYSE: MYL) announced a deal to buy Merck KGaA’s (DE: MRCG) generic pharmaceutical business for $6.7 billion (€4.9 billion) in cash. In so doing, Mylan beat out a number of competitors to secure its position as the world’s fourth-largest generic pharma company.
Headquartered in Canonsburg, Pennsylvania, Mylan develops, manufactures and markets generic and brand pharmaceutical products. On a 12-month trailing basis, MYL generated revenue of $1.5 billion, EBITDA of $551.0 million and net income of $346.0 million. Like other generic pharmas, MYL has sought to increase its market share through acquisition. In 2004, the company bid $4.0 billion for King Pharmaceuticals (NYSE: KG), but that deal ultimately fell apart because the parties could not agree to terms. Last year, the company paid $736.0 million to acquire a 71.5% interest in India’s Matrix Laboratories (Mumbai:524794).
Based in Darmstadt, Germany, Merck KGaA is a chemical and pharmaceutical company that is 73% family owned, with the remaining 27% publicly traded. Its generic pharma unit is the world’s fourth-largest, with over 400 products; in 2006, the generics unit generated revenue of $2.45 billion and EBITDA of $450.0 million. But with its $13.3 billion acquisition of Serono, S.A., which closed January 1, 2007, MRCG has decisively shifted its core focus toward biotechnology and away from generics.
The Mylan-Merck merger will create a company with combined revenue of $4.2 billion and EBITDA of $1.0 billion. It will further extend MYL’s global reach, enabling the company to compete with the top three generic pharma companies: Teva Pharmaceutical Industries (NASDAQ: TEVA), Novartis’ (NYSE: NVS) Sandoz unit and Barr Pharmaceuticals (NYSE: BRL).
The price is 2.7x 2006 revenue and 14.9x EBITDA. Some shareholders have complained that the price paid is too steep, resulting in a highly leveraged Mylan; others feel it comes too soon after the $736.0 million acquisition of Matrix Labs, making it hard to assess the true financial impact (as opposed to pro forma projections) of another deal. But from a price-to-revenue (P/R) perspective, it is unremarkable. The chart on page 9 of the issue gives the price and P/R multiple for 30 deals involving generic pharma companies or products over the past four years. The average P/R multiple during this period is 2.7x, while the median is 2.2x. Even so, on the announcement of the deal, the market sent the price of MYL down over worries of dilution of the stock.
For its part, MRCG will use the proceeds to pay down debt incurred from its acquisition of Serono.
In The Aftermath Of The Deal
This deal clearly secures Mylan’s position among the leading generic pharmaceutical companies; however, the bidding process also revealed how some of the losing bidders approach dealmaking and what their goals are in the M&A market. Teva ultimately bowed out, noting that while the MRCG generics business would have been a strategic fit, it didn’t meet the company’s investment criteria. As top dog in the generics world, Teva most likely saw no strategic advantage in overextending its resources.
Another bidder, Iceland’s Actavis Group hf (ISE: ACT), has come up short in several proposed acquisitions. It tried to buy Pliva—which Barr acquired last year—then MRCG’s generic business, but failed both times. The board issued a statement that ACT would not pursue the MRCG generics business into the final round (only TEVA and MYL got that far), because “the transaction would not produce value for Actavis’s shareholders.” Reading between the lines, they seem to have felt unduly constrained by shareholders’ concerns over how much they could risk.
Perhaps as a result of this, Actavis recently received a proposal from The Novator Group, which is controlled by ACT’s chairman, Bjorgolfur Thor Bjorgolfsson, to take the company private in a transaction worth $4.5 billion (at €0.98 per share). Such a deal, it is argued, would allow Actavis to move more nimbly in the consolidation market without the encumbrance of the disclosure constraints, short-term earnings dilution, etc. that hobble public companies. The bid to privatize the company offers ACT shareholders only a modest 9% premium, which some trusting shareholders took as a signal that a counterbid might be forthcoming from another source. However, entities related to Novator Group hold 38.5% of ACT’s class A common shares. (All told, just 20 shareholders hold 79.3% of the stock.) With Mr. Bjorgolfsson’s holding, which could effectively stymie any counteroffer, the hope of another buyer seems unfounded to us. But hope, as they say, springs eternal (P.T. Barnum would put it differently); on the announcement, the stock rose nearly 12%, wiping out the premium. Still, we are left wondering whether ACT’s failure to close these large deals is really due to a concern for how minority shareholders would react or to an M&A team that has been unceremoniously bested in some high-profile deals.
Such a proposal comes at a time when management-led buyouts are feeling the heat of greater scrutiny from various quarters. The Delaware Court of Chancery, for example, may now start taking a closer took at private equity buyouts where potential conflicts arise involving the managers of the target companies. Vice Chancellor Leo Strine, Jr. has indicated that Delaware’s courts will take a heightened interest where certain aspects of corporate law, hitherto unexplored, are emerging. The offer to keep his job under a new ownership, for instance, might compromise a CEO’s motivation to shop the company to the highest bidder and do right by shareholders. Readers will recall that such concerns arose in CVS Corp.’s (NYSE: CVS) recent $26.5 billion acquisition of Caremark Rx. CEOs with a promise of job security would, after all, have a vested interest and could find themselves in a position to sink the value of a stock before buying it to make the cost of acquiring the company as low as possible. This is the stuff that litigators’ dreams are made of.
A comparable case is Bradley Pharmaceuticals (NYSE: BDY), whose CEO has offered to privatize the company at $21.50 per share, or about $228.1 million (which includes $65.4 million in debt). This buyout proposal offers BDY shareholders a 17% premium over the stock’s prior-day price, closer to the average premium of 20%; even so, the stock rose to 4% above the proposed offer.
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