Hostile drug deal gets too clever for its own good

April 18, 2013

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

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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