Depomed Learns It’s Tough to Say No Amid a Deal Frenzy: Real M&A

Depomed Inc. may be about to learn that you don’t snub a takeover partner in the thick of the industry’s biggest merger frenzy.

The maker of painkillers and anti-seizure medicines is now the target of a hostile bid from Horizon Pharma Plc, which says Depomed has refused to engage in talks since March. Horizon is offering $29.25 a share in stock, or about $3 billion including debt. Depomed surged 35 percent to $27.86 at 12:33 p.m. New York time, an indication that shareholders are welcoming Horizon’s interest and betting a deal will get done.

The offer is compelling given that analysts estimate Depomed shares would trade for only about $28 apiece on a stand-alone basis in the next 12 months, according to data compiled by Bloomberg. By engaging with Horizon, Depomed could get an even better price or lure another suitor.

And while investors almost always prefer cash bids, Horizon shares have outperformed most of their peers this year, more than doubling for a market value of $5 billion. Receiving the company’s stock may still be a good deal for Depomed shareholders, who would own about 25 percent of the combined entity. That’s attractive for Depomed investors looking at the company’s “crowded” balance sheet, Traver Davis, an analyst for Piper Jaffray Cos., wrote in a report Tuesday.

“Depomed’s options to fight off a hostile bid are relatively limited,” Davis said.

Acquisition Wave

A deal also gives Depomed shareholders the chance to profit from the acquisition wave that’s already swept up dozens of other drugmakers about the same size as buyers prove willing to pay steep prices. In the past 12 months, there’s been a record $298 billion of deals struck for drug and biotechnology companies. The transaction prices are the highest in at least 20 years relative to revenue and earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show.

Horizon’s $29.25-a-share bid may leave room for other suitors to step in, according to Davis, who estimates $34 to be a “more reasonable” takeover price. Depomed was trading above $27 a share as recently as April.

The deal would make sense for a buyer with tax advantages - - like Dublin-based Horizon -- because Depomed’s long-term tax rate looks to be in the high 30 percent range, Davis wrote. Industry buyers from Shire Plc to Endo International Plc and Valeant Pharmaceuticals International Inc. have moved their legal addresses outside the U.S., which has lowered their taxes and provided more firepower to buy companies that haven’t yet undergone tax inversions, such as Depomed.

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