Markman Capital Insight

Teva's bid for Mylan will get ugly

The melee of the molecules continues as Teva Pharmaceuticals (TEVA) pressed its unsolicited offer for generic drug maker Mylan (MYL).

Teva is quite the avid pursuer, as it just closed its purchase of Auspex Pharmaceuticals (ASPX) in March to get access to its portfolio of central nervous system treatments.

Mylan is playing harder to get, however, because its executives know their portfolio of soft-gel caps, topical, and inhalant technologies is unique in the industry. The deal would be the second largest healthcare transaction of the past year.

Teva has room to push ahead, as I’ll discuss below. But to fully understand the dramatics, a little background is necessary.

On April 8, Mylan made a bid for generic drug maker Perrigo (PRGO) at $205 a share in cash and stock. At the time, the chatter was that Mylan’s offer was a tactic to fend off a potential suitor.

On April 18, Mylan went public with Teva’s private offer, stating that management had “studied the potential combination” of the two companies and “believes it is clear that such a combination is without sound industrial logic or cultural fit.” If they were on Tinder, they would’ve swiped to the left.

On April 21, Teva unveiled its $82 a share offer for Mylan in cash and stock, which represented a 21% premium to the price that day. The deal would be worth $40 billion. In its offer to shareholders, Teva talked up deal synergies (accretive to earnings immediately, and increasing through the third year) and the attractiveness of its offer compared to Mylan’s own bid for Perrigo. Major Mylan shareholders, including Paulson & Co., supported the offer.

On April 24, Perrigo confirmed its rejection of Mylan’s unsolicited bid saying it significantly undervalued the company.

On April 27, Mylan formally rejected Teva’s offer while getting in a few jabs at its would-be suitor, criticizing its leadership team’s ability to deliver shareholder value. Teva responded by saying it was committed to a deal and had already filed pre-merger paperwork with regulators.

That brings you up to speed.

Teva has now sent a letter to Mylan reiterating its offer and attempting to address concerns such as post-deal divestitures and regulatory hurdles while countering that it was hard to reconcile Mylan management’s “preemptive” rejection, offer for Perrigo, and the tone of its rejection letter with “the proper exercise of fiduciary responsibilities under any legal or business framework.”

Mylan, for its part, increased its offer for Perrigo to $222 a share (making the deal worth more than $30 billion), but it was swiftly rejected.

As for where this could go next, analysts at Gabelli believe Teva could pay upwards of $120 a share for Mylan and still have the deal be neutral to earnings per share in the first year and double-digit accretive by the third year. Whether this is enough to make Mylan’s management friendly to a tie-up is an open question, but it should keep biotech valuations spinning higher and investors interested in the M&A machinations for weeks to come.

Teva is meeting with key Mylan shareholders in an effort to win their support in a coup against company management. It looks like the Israeli company could be successful: Five investors polled by Bloomberg on Monday said a suitable price would be $85 to $95 a share.

The next act will likely feature a raised bid from Teva followed by a tender offer to shareholders or a shareholder move against Mylan’s management. This could get really nasty. Stay tuned.

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