Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Jean-Pierre Garnier is facing his biggest corporate challenge since stepping down as CEO of GlaxoSmithKline Plc in 2008. As chairman of Actelion Ltd., it's up to him to ensure the biotech's shareholders aren't left shortchanged after a takeover approach by Johnson & Johnson.

Shortchanged in this case is unlikely to mean Actelion being sold on the cheap. J&J has suggested it could pay more than 250 Swiss francs per share for the pulmonary hypertension specialist, according to Bloomberg News. That proposal, valuing it at some 26.6 billion Swiss francs ($26.3 billion) including net cash, came after an initial 246 Swiss franc offer was rebuffed.

Such a price looks acceptable on any conventional assessment. It would be a 56 percent premium to the Actelion shares' six-month average and a 44 percent premium to their all-time high touched only in July. But in biotech such conventions count for little.

Looks Pricey, Is Pricey
An offer for Actelion at CHF 250 per share would sit comfortably beside Pfizer's recent deal for Medivation
Source: Bloomberg

Could Actelion get to that level in the next 18-24 months by going it alone? Perhaps. The stock rose by a compound yearly average of 44 percent between 2012 and 2015. That followed the company's success in launching medicines to succeed its core Tracleer drug, which came off patent last year. Still, the shares have slowed in 2016 and it's hard to see where the next leg up comes from. The future generation of drugs will take considerable time and investment.

Cruising Altitude
Actelion shares were levelling off after a rapid four-year ascent when J&J's approach emerged
Source: Bloomberg

Could J&J, or another bidder, be squeezed to pay much more? That's hard to see. Actelion is forecast to make 1.6 billion Swiss francs of operating profits in 2020. Suppose J&J shut down Actelion's R&D function and saved some tax through Actelion's Swiss domicile. That might lift forecast operating profit to 2.5 billion Swiss francs. Even allowing for a low tax bill, the return on investing 27 billion Swiss francs would be only about 8 percent, about 1 percentage point below Actelion's cost of capital.

Yet for Actelion's founder managers, led by CEO Jean-Paul Clozel, this may still not be a high enough price to compensate for being swallowed up by big pharma. Clozel has been very clear about his ambition for the company as an independent entity.

That commitment to a standalone future has doubtless pushed J&J to consider such generous terms. But Garnier needs to ensure that the board acts in the interests of all shareholders, not just Clozel. Switzerland's no stranger to battles between corporate founders and independent shareholders. Investors in Swiss adhesives group Sika AG are still fighting for their rights after the founding family cut a deal to hand control to France's Compagnie de Saint-Gobain without independent shareholders getting any compensation, against their wish to keep the status quo. 

The Actelion case is different because it's about whether ordinary shareholders might do better from selling out. But it's still a test of the chairman's ability to represent all investors. Maybe Actelion is worth more than what J&J is willing to pay. If so, it will need some precision science to prove it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net