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PharMerica Poison Pill Gets Biggest Takeover Increase: Real M&A

PharMerica Corp. is poised to secure the biggest takeover price increase in America after rejecting Omnicare Inc.’s advances and embracing a poison pill defense against hostile acquirers.

After PharMerica shunned Omnicare’s $15-a-share proposal in August to combine the two largest U.S. distributors of medical drugs for nursing homes and hospitals, the companies agreed last month to share data regarding the deal’s antitrust risks. PharMerica closed 5.3 percent higher than the cash bid yesterday, indicating traders are betting on a steeper price increase than any other all-cash takeover in the U.S. greater than $500 million, according to data compiled by Bloomberg.

While the 28 percent premium for Louisville, Kentucky-based PharMerica is in line with past medical drug and pharmaceutical services deals, the $700 million offer including net debt is the cheapest in the industry relative to sales since 2003, the data show. With PharMerica’s poison pill forcing board negotiations for a deal, Omnicare, the largest U.S. drug supplier to nursing homes, may be willing to boost its bid to as high as $22 a share to secure 60 percent of the pharmacy-services market, according to Gabelli & Co.

“They’ll negotiate a higher price” after getting regulatory approval, Jason Gurda, a New York-based analyst at healthcare investment bank Leerink Swann LLC, said in a telephone interview. “The poison pill was put in place to make sure Omnicare negotiates with PharMerica’s management and doesn’t go around them.”

Cheapest Revenue Multiple

PharMerica Chief Financial Officer Michael Culotta didn’t return a telephone call seeking comment. Covington, Kentucky-based Omnicare declined to comment beyond a statement released yesterday that said a combination “is in the best interests of all parties” and it wants to complete due diligence so that the companies can negotiate.

Omnicare’s bid disclosed Aug. 23 at a 28 percent premium to PharMerica’s prior 20-day stock trading average compares with the average premium of 30 percent for takeovers of U.S. medical drug and pharmacy services companies greater than $500 million, data compiled by Bloomberg show.

Still, $15 a share was below the stock’s average of $15.88 since the company became publicly traded in 2007. The proposal valuing PharMerica’s equity at $441 million plus $259 million in net debt was only 0.35 times PharMerica’s sales. That’s the lowest revenue multiple since Caremark RX Inc. agreed to buy pharmacy-benefits manager AdvancePCS at 0.33 times sales in 2003, the industry’s cheapest takeover on record, data compiled by Bloomberg show.

Antitrust Risk

PharMerica shares traded below the value of the deal through Oct. 26 as management adopted a shareholder rights plan to block hostile bids and said Omnicare’s proposal “undervalues” the company.

Since PharMerica and Omnicare agreed last month to exchange information related to the potential antitrust risk posed by the combination, the shares closed as high as $16.40 this week, 9.3 percent above the deal price.

“The two companies finally agreed that they would work together,” Jeff Jonas, an analyst at Gabelli in Rye, New York, said in a phone interview. “That really raised everyone’s optimism that they could eventually get a friendly deal done, and it would certainly be done at a higher price than what’s on the table.”

PharMerica shares closed 5.3 percent above the bid yesterday. That’s the widest gap of any all-cash takeover greater than $500 million that’s been announced in the U.S., data compiled by Bloomberg show.

Due Diligence

The shares retreated 3.7 percent to $15.79 yesterday after PharMerica said in a regulatory filing that Omnicare has “no intention of agreeing to terms with PharMerica, if at all,” before the U.S. Federal Trade Commission completes its review. The company said Omnicare has been changing due-diligence requests that it requires before discussing price or antitrust risk and instead may be trying to “inflict damage” on PharMerica’s business.

Omnicare responded that it’s requesting “standard and customary due diligence” and wants to work with PharMerica to “allay potential concerns regarding the process.”

“We have been - and remain - willing to discuss contractual risk, potential synergies and price as long as PharMerica affords Omnicare the opportunity to conduct a customary level of due diligence and engage in good faith negotiations,” Omnicare said in yesterday’s statement. “Omnicare has always preferred to reach an agreement prior to the completion of the Federal Trade Commission’s review.”

‘Ticking Clock’

PharMerica fell 1.8 percent to $15.50 today in New York, while Omnicare retreated 2.9 percent to $29.95.

The likelihood of the deal gaining regulatory approval is still a “coin flip,” according to Gabelli’s Jonas. Even if the transaction is approved, the companies may be forced to divest some regional operations, Steven Halper, a New York-based analyst at Stifel Nicolaus & Co., said in a phone interview.

The takeover would give the combined company greater scale, allowing it to negotiate bigger discounts with drug manufacturers, particularly for generic medicines, and eliminate costs by shutting some of PharMerica’s facilities located in areas that overlap with Omnicare’s network, Jonas said.

“The longer this thing drags on, some of the benefits Omnicare would’ve gotten from the transaction will start diminishing,” Frank Morgan, a Nashville, Tennessee-based analyst at RBC Capital Markets, said in a phone interview. “There’s a ticking clock here assuming you can get some resolution from the FTC.”

Wave of Generics

Omnicare wrote in a Sept. 30 letter to PharMerica shareholders that the time for the transaction is “now” to benefit from a wave of generic drugs coming on the market in the next few years. PharMerica is expecting about 12 “material” prescription drugs to become available for sale as generics next year, according to the company’s third-quarter regulatory filing.

The acquisition may result in total cost savings of as much as $150 million for Omnicare and boost its earnings by at least 25 percent during the next few years, Adam Feinstein, an analyst at Barclays Plc in New York, wrote in a note to clients Oct. 31.

“Clearly the market is anticipating a higher price,” RBC’s Morgan said. “This transaction would make lots of strategic sense. It would create efficiencies both from the drug buys and distribution costs.”

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