This week we’ll discuss Sanofi-Aventis’ (SNY) potential acquisition of Genzyme (GENZ). Despite the dozens of news items in the past few months, the story remains essentially the same: Sanofi wants Genzyme, but at an unpalatable price. Unofficial, friendly merger talks began over the summer, but now the $18.5 billion bid has gone hostile.
A little background on both parties. Sanofi-Aventis is a French pharmaceutical company, which, according to Bloomberg, has spent $17 billion on 25 acquisitions since the current CEO, Chris Viehbacher, joined the company from GlaxoSmithKline (GSK) in 2008. Big pharma is looking to boost its revenue growth as its own R&D piplelines slowly chug along and as competition from generic brands heightens. Sanofi cut its earnings forecast in its second quarter earnings release after regulators approved a generic drug to compete with Sanofi’s Lovenox, which is used to reduce the risk of deep vein thrombosis i.e. DVT blood clots.
By acquiring smaller rivals, particularly in the biotech space, these behemoths figure they can open up some new revenue streams. Genzyme, based in Cambridge, Massachusetts and one of the four largest of these biotech companies, makes drugs to treat rare genetic illnesses, such as Gaucher’s and Fabry’s disease. Since a viral contamination in its Boston manufacturing facility disrupted the production and distribution of its products, particularly Cerezyme (Gaucher’s disease) and Fabrazyme (Fabry’s disease), its stock has taken a hit. Genzyme has assured its shareholders and the stingy misers over at Sanofi that these distruptions and the consequential hit to revenue will end within the year.
The talks began in mid-summer or possibly earlier. During the “informal” discussions, before anything official hit the table, Genzyme rejected the $69 per share cash offer, arguing that the price, which represents a 38% premium over Genzyme’s share price pre-merger rumors, failed to incorporate the revenue recovery that Genzyme would achieve after it cleaned up the on-the-loose viruses and resumed regular production and distribution of all the affected drugs.
In early August, the talks got a bit more formal: Sanofi wrote a “bear hug” letter to Genzyme with a mildly hostile undertone, again for $69 per share. You’ve got to love that image: if Sanofi is the bear in this scenario, Genzyme knows it’s getting a hug, but isn’t so sure whether it’s a “hey, let’s be friends” kind of hug or an “I’m going to eat you” kind of hug. Only time would tell at that point.
At the end of August, Sanofi went public with its $69 per share offer, but Genzyme immediately rejected it again. In the rejection letter, Henri A. Termeer, CEO of Genzyme, wrote to Viehbacher, “You and your advisors claim you are willing to pay more but that you are unwilling to ‘bid against yourself.’ The Genzyme board is not prepared to engage in merger negotiations with Sanofi based upon an opportunistic proposal with an unrealistic starting price that dramatically undervalues our company.” Again, ouch. Genzyme may have a point though: most biotech deals close between 5 and 6 times sales, whereas Sanofi’s offer is at 4 times sales.
In early September, Sanofi’s Viehbacher started meeting directly with investors since he felt he wasn’t getting anywhere with the Genzyme board, who continued to “stonewall” him like Jackson at Bull Run. Plus, Sanofi has lined up around $15 billion in financing for the deal from a consortium of banks, which is really sending the message that Sanofi plans to make the acquisition, whether Genzyme likes it or not.
Viehbacher then tried to meet with Genzyme’s board in mid-September, and based on the back-and-forth that continues from both sides, we really don’t know who said what during this meeting. By October 4th, Sanofi had had enough fooling around and Viehbacher felt he had “no alternative”: this past Monday, Sanofi went hostile (yes, at $69 per share again) after Genzyme repeatedly refused to allow Sanofi to look at its books to come up with an ostensibly higher valuation. This tender offer expires December 10th. It seems that in that bear hug letter from August, Genzyme really was dealing with an aggressor.
As we expected, on Thursday Genzyme rejected the offer yet again and started a contentious war about what was said that mid-September day in the board’s meeting with Sanofi. In a regulatory filing, Genzyme claimed that Viehbacher felt it would pay somewhere between $69 and $80 per share. Considering the only number we’ve heard from the Sanofi boss himself was $69 per share, this is a fascinating accusation. Maybe it’s a psychological tactic?
Sanofi’s response: “We offered no price range, and Genzyme continued to refuse to engage with us on valuation.” Now, Genzyme is meeting with potential buyers to figure out what it’s worth, but it assures investors and the broad public that it’s not for sale. Initially GlaxoSmithKline, Pfizer (PFE), and Johnson & Johnson (JNJ) had expressed some interest, but we haven’t heard much from them on the Genzyme front. Go figure. Sounds like Genzyme just wants to justify a higher number and force Sanofi to cough up the money.
As December approaches, the who-said-what fight will likely escalate. The question now is, what can Genzyme do to fend off Sanofi? Sanofi may be able to weasel its way around a Massachusetts business combination statue by acquiring more than 90% of Genzyme through the tender offering, but Genzyme could just turn around and adopt a poison pill, which would dilute Sanofi’s ownership. Genzyme could also put off its next annual board meeting, during which the company would have to reelect all directors. By putting it off for about 15 months, Genzyme could avoid a proxy contest that would replace Genzyme’s directors with those friendly to the merger.
The presence on Genzyme’s board of Carl C. Icahn and Ralph Whitworth, both activist investors, complicates matters even more: Icahn controls two board seats while Whitworth is the head of the board committee that handles strategic planning and capital allocation and has a say in this deal. Both likely want to get a deal done, but not at $69 per share. Either way, it looks like Sanofi will need to be a little nicer to the Genzyme board if it wants to acquire.
Ultimately, this story will have to end somewhere in the middle. Maybe the two companies will split the difference between $69 and $80 per share. The market seems to think Sanofi will need to go higher: Genzyme stock has been trading in the low $70s since speculation about the merger began in mid-summer, and now it looks like it’s creeping up into the mid-$70s.
The problem is, Sanofi shareholders, including the top two owners L’Oreal and Total, don’t want Sanofi to overpay, but it looks like Genzyme wants at least $80. At this point, Genzyme will likely stall and stonewall until it gets a price that it wants, either from Sanofi or a White Knight. In the words of Stonewall Jackson, “When war comes, my advice is to draw the sword and throw away the scabbard.” Even Stonewall himself knew when to avoid stonewalling. Genzyme will need to justify a higher price if it expects to get one.
Disclosure: No positions in the stocks mentioned.