Sanofi, Genzyme play chicken over price

August 30, 2010

“Let me in and I might go higher.” That in a nutshell is the message Sanofi-Aventis chief executive Chris Viehbacher is sending Genzyme’s management in making public his $18.5 billion offer to buy the U.S. biotech company. The all-cash structure is intended to show that the French pharmaceuticals group is serious. But the lowball $69-a-share price has failed to move Genzyme’s board. Viehbacher will be hoping that changes — his threat of a hostile bid looks hollow for now.

One of his problems is that the price is hardly going to bowl Genzyme’s shareholders over. Despite amounting to a near-30 percent premium over the undisturbed price before rumours started flying more than a month ago, Sanofi’s offer values its target at about four times sales when biotechs usually go for five or six times.

His other problem is that without Genzyme’s cooperation, the U.S. company’s shareholders will know that any sweetening of an offer would be limited by uncertainty — say to around $70 a share, the level news reports suggest Sanofi’s board has authorized. That’s because to have greater clarity, the French group would prefer first to have a good look at its target’s books to help assess the extent of the industrial problems that have caused Genzyme to operate under the close monitoring of the U.S. Food and Drug Administration.

So while Viehbacher’s move may look like a step towards hostility, Sanofi would do better to avoid taking that road. Rather, the French group may be betting that in going more public with its offer, some Genzyme shareholders will pressure their board to talk in the hope a significantly higher price would be forthcoming for a friendly deal.

After all, Sanofi could easily afford to pay more. At $77 a share, for instance — roughly mid-way between the current offer and the price that would accord Genzyme a valuation multiple at the lower end of usual biotech deals — funding the $20.5 billion purchase would only take Sanofi’s debt to about 1.5 times its EBITDA. But for now Sanofi doesn’t want to go higher until it knows exactly what it would be buying, while Genzyme isn’t letting the French group in without a higher price. It’s a game of chicken.

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