Perrigo Company (NYSE:PRGO; TASE:PRGO) chairman and CEO Joseph Papa arrived in Israel yesterday for a face-to-face meeting with the heads of Israel investment institutions holding Perrigo shares in order to persuade them to turn down Mylan Pharmaceuticals' offer to purchase.
Beyond the strong and unequivocal message that Papa wants to deliver to Israeli investors (who account for 10% of Perrigo's shareholders), he is also showing great confidence that Mylan's offer to purchase will fail, after which Perrigo will have many opportunities to continue its independent growth. "The board of directors is unhesitatingly recommending against accepting the offer to purchase. As an independent company, Perrigo offers more value to its shareholders than what is on the table in the Mylan offer," Papa says.
Perrigo executive VP and CFO Judy Brown has another recommendation. "I told someone not to accept the offer to purchase, and he told me that he doesn't own any Perrigo shares. Even if you don't own any directly, however, the financial institution managing your pension certainly invests, and in recent years, your pension has benefitted from Perrigo's being listed on the stock exchange here. It's important that we continue to be traded here - call your investment house and recommend that they oppose the offer."
Mylan is trying to take over Perrigo in an $25.1 billion deal (shares and cash), while Perrigo's current market cap in New York and Tel Aviv is $22.6 billion.
Papa also stressed the importance of being traded on the local stock exchange and Perrigo's business in Israel, saying, "We've already been listed for trading on the TASE for a decade, and we're glad to be here." Perrigo was first listed on the TASE after it acquired local pharmaceutical company Agis in 2005. "Since we joined the TASE, we've made giant strides our value at that time was $1.5 billion. Our Israeli activity is very important for our R&D. Our site in Yeruham generates a good return on invested capital (ROIC) for us, and is very important to our future. In recent years, we invested over $100 million in our Israeli business. It was important for me to come here myself and emphasize this message," Papa adds.
In similar past cases, a company's effort to protect itself against a hostile takeover brought forth a white knight in the form of a different company coming and acquiring the object of the hostile takeover. Asked whether other companies were showing interest, Papa answered, "Perrigo isn't opposed to a deal, but it doesn't want a bad deal. That's a significant difference, and Mylan is a bad deal. If it were a good deal, we'd talk, but we don't want a deal that's bad for our shareholders. There have been phone calls on the subject (by other companies showing interest, S.H.-V.). Given the volatility of the market, it's important for us to focus on what we can do well by ourselves. Once the situation changes, we can concentrate on other acquisitions."
"Globes": Given the prominent trend towards mergers and acquisitions in the pharmaceutical industry, will Perrigo be able to remain an independent company in another 5-10 years?
Brown: "Some of the consolidation in the industry is due to the desire to companies to be leaner and meaner in their operations, after losing a patent or exclusivity for their main product. We're not exposed to just one product. The beauty of our model is that appealing to the consumer market is a platform that can be added to, and can grow."
In recent weeks, the Perrigo share has been taking it on the nose from the investors, with its share price losing 16% of its value since mid-September, similar to many companies in the pharmaceutical sector and beyond it. In April, when Mylan first revised acquisition bid for Perrigo, the share price for Perrigo mentioned was $205 - a 32.8% premium on the current price. At the current value of the Perrigo share, the price would be $171.30 per Perrigo share, a premium of only 11% on the current share price.
As part of the struggle over the takeover attempt, Perrigo last week published several measures it was taking in order to save $175 million a year. These measures include a cut of 800 in personnel, the sale of the company's vitamins business in the US, and consolidation of its supply chain. Another measure is a major $500 million plan for buying back the company's shares from the date after the offer to purchase ends (Perrigo cannot do it earlier) by the end of the year, and $1.5 billion for the same purpose from January 2016, unless other major acquisition opportunities emerge.
Is this another tactical move against the Mylan deal? "I would put it differently," Papa answers. "We believe that our share is very undervalued because of the Mylan question. Right now, there's a linked between the Perrigo and Mylan shares, and so the profit multiple at which our share is traded is lower than our historical multiple. For this reason, there's now an opportunity to buy shares. Buying $500 million in shares by the end of the year is important, not only because of Mylan, but because the share is underpriced. Beyond that, $1.5 billion more will be allocated starting in January on the basis of comparison to other opportunities."
Brown: "We're simply taking advantage of the anomaly in the market right now. There's a lot of fuss in the health sector, and the entire sector is going down. The chaos in the market is creating an opportunity for us at low prices, before we revert to our usual multiples."
"Pharmageddon" anxiety
One possible scenario is that Mylan will obtain control of Perrigo, but not full ownership, if 50-80% of the shareholders accept its offer. Less than 50% acceptance means that the offer to purchase has failed, and higher than 80% acceptance means that Mylan will gain full ownership of Perrigo, which will become its subsidiary.
Brown calls the 50-80% scenario "Pharmageddon" (a combination of pharma and Armageddon, because it is unclear who will be responsible. Papa was also asked about this scenario. "We don't believe they'll get 50%, but if they do, there will be a chaotic process. Perrigo employees will have uncertainty hanging over them. Mylan will want to change the composition of the board and management. It will take time, and delay the synergy they claim they'll achieve.
"Mylan has used scare tactics, which we think are inappropriate," Papa adds. "You can accept the offer to purchase if that's your decision - in our opinion, it's wrong - but don't accept it because you're afraid of the 50% situation." Brown notes that under Irish law, to which Perrigo is subject, if Mylan obtains 50-80% ownership, the minority shareholders will have an addition two-week period to accept the offer to purchase on the same terms. "That's part of their effort to generate fear," she argued.
Published by Globes [online], Israel business news - www.globes-online.com - on October 28, 2015
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