DEAL REPORTER
Shareholder estimates Perrigo-Mylan valued in mid-60s
Perrigo cost synergies number absent in latest offer
Teva claims positive feedback on Mylan offer
Mylan (NASDAQ:MYL) will likely have to raise its offer again to get Perrigo (NYSE:PRGO) to the negotiating table, according to two Perrigo shareholders.
Mylan, which is fighting off a hostile proposal by Teva Pharmaceuticals (NYSE:TEVA), raised its unsolicited offer for the competing pharma company for the third time on 29 April, offering USD 75 in cash and 2.3 Mylan shares for each Perrigo share, up from USD 60 in cash and 2.2 Mylan shares offered on 24 April. Mylan made its first move for Perrigo on 8 April at USD 205 per share, valuing the target at USD 29bn, without specifying any cash/share split.
For its part, Mylan will probably have to persuade its own shareholders that a combination of Mylan and Perrigo creates more value than a combination with Teva, which may be a hard sell, said one of the shareholders.
A combined Mylan-Perrigo would likely have a pro-forma share valuation somewhere in the mid-60s after factoring in dilution from the new shares to be issued for the deal, according to this shareholder.
In late April, Teva offered to buy Mylan for USD 82 per share, in cash and stock, or about USD 43bn, and speculation is mounting that Teva will raise its offer to as much as USD 90 to catch Mylan investors attention.
One of the shareholders said that the question for Mylan shareholders is “why should I vote for you buying Perrigo and getting into the mid to high-60s when I could get USD 90 with Teva?”
Mylan said in its letter earlier this week a fair valuation of the company is more than USD 100 per share and Teva should provide terms that offset antitrust risks.
“Mylan’s response was predictable, and the reasons they mention in the letter are there. But that doesn't mean the deal gets scuttled or can't be done.The worse thing is that they will still get a higher offer, Teva won't be dissuaded just yet,’’ an industry banker said. He added that Mylan continues to be in a problematic situation and noted that “even if Perrigo wanted to do a deal, they have no idea if Mylan gets bought by Teva”.
In response to a bump by Teva, the second Perrigo shareholder said he could conceive the possibility of Mylan stretching its offer to USD 90 in cash and 2.4 shares for Perrigo, pointing out that Mylan appears determined not to negotiate with Teva.
“That gets you to a 35% premium to Perrigo shares before the first proposal was made,” the same shareholder explained.
But he said Mylan has a fiduciary obligation to consider the Teva offer or any other offers to protect shareholder interests. A large Mylan shareholder agreed, saying he “hopes the Mylan board thinks of us and other shareholders.”
The first shareholder said Mylan could face serious credit rating issues if it were to borrow the kind of cash needed to compete with a Teva offer. “They can’t take their leverage too high,” or ratings agencies can downgrade its debt to junk, he added. “You don’t have the flexibility to do that.”
Mylan’s credit rating is Baa3 with Moody’s and BBB- with S&P, just above non-investment grade.
An industry banker agreed, saying “Mylan is restricted. Too much leverage will not fly with their investors.”
Aside from these factors, Mylan would need a shareholder vote on any deal on the table for Perrigo, which it may not be able to win, the same banker said. The Perrigo deal was pitched on having cost-saving synergies of USD 800m in the first offer, but it did not mention the same savings in the latest offer.
The latest Mylan offer for Perrigo “is not value accretive to Mylan shareholders, generating negative returns on a net present value basis,” said Citibank analyst Liav Abraham in a note on Wednesday. “Our financial analysis and conversations with Mylan shareholders indicate a preference for a Teva-Mylan combination, which provides Mylan shareholders.”
The value of Mylan’s offer for Perrigo is contingent on an interpretation of what is the “unaffected” price of Mylan was prior to any bid speculation, the first and a second industry banker said.
There was market speculation that Mylan was going to make a transformative deal in March when its stock was trading at around USD 55. However, Mylan claims the value of the offer should be based on its closing price of USD 68.36, the first day of market reaction to its initial Perrigo proposal, making the offer valued at USD 232.23 per share.
Even though it has a higher bid on the table, Teva still faces significant obstacles to winning Mylan. Based in the Netherlands, Mylan has a poison pill in the form of a ‘stichting’ foundation that can decide whether to vote for the Teva deal. However, a source familiar with the situation said the structure of stichtings allows for only limited obstacles for Teva.
The same source claimed Teva’s proposal has received positive feedback from Mylan shareholders and the Israel-based pharma company is aware that a possible deal with Mylan will be a “long drawn out battle.”
Teva may face significant antitrust challenges in merging two major large branded and generics drugmakers. It has said the issues are surmountable with divestitures and expects a Mylan merger to generate USD 2bn in synergies.
A third industry banker said if Teva wins, the “FTC is going to be very aggressive on this deal” given that generic drug prices are rising and consolidation would be likely to speed that trend. However, he was of the view antitrust issues are not “as big as some people think they are.”
This industry banker and the Mylan shareholder said there remains a possibility that both potential mergers will fail, since Mylan is steadfast in resisting Teva and Perrigo is not inclined to deal with Mylan.
“There is a small probability that nothing happens for both of them,” the third industry banker said.
Mylan was recently trading at USD75.43, down 1.3%.