Novartis Ups Bid for Chiron

April 12, 2006
Pharmaceutical Executive
Volume 0, Issue 0

Industry experts weigh in on what could be the resolution of a long saga.

Novartis AG increased its bid to acquire 56 percent of shares in Chiron Corp. to $48 per share, April 3.

    The Swiss company, which already owns the other 44 percent of Chiron shares, had previously offered $45 per share, which was accepted by the non-Novartis members of the Chiron board. But the deal met with resistance from ValueAct Capital and CAM North America, funds which held large blocks of shares, as well as from one of the two proxy advisors evaluating the company, Institutional Shareholder Services.

    After a weekend of negotiations, Novartis agreed to amend its offer. Chiron’s shareholders, including those from Novartis, are scheduled to decide on the bid April 19.

    Chiron’s board rejected a $40-per-share bit from Novartis last fall.

    Russell Gilbertson, analyst for Caris and Company, predicted in an April 4 report that the offer will be accepted, because ValueAct Capital and CAM North America are both on board with the deal.

    “Everyone seems to agree that $48 makes sense,” said Peter Young, president of specialized investment banking firm Young and Partners.

    Young added that Chiron was uniquely difficult to value because of the complexity of players involved.

    The two proxy advisors were split on the previous $45 per share offer, leaving Chiron in a difficult position, Young explained. In addition, ValueAct Capital had disagreements with Chiron’s management about their portrayal of the company leading up to the deal.

    “It’s not that common for a big fund to have a position that could make or break a deal,” Young said.

    Lastly, Chiron had to please the plaintiffs in several shareholder lawsuits prompted by the board’s acceptance of the $45 offer, Young explained.

    Roger Aguinaldo, chief executive officer and publisher of M&A Advisor, speculated that the two companies had trouble negotiating a price because Novartis believed that its 44 percent stake in the company contributed to Chiron’s value.

    “The value Novartis gave is reflected in the increased value of the rest of the stock,” Aguinaldo said.

    One way for other companies to avoid a similar predicament would be to agree on a formula to calculate the value of remaining shares when they purchase a stake in a company, Aguinaldo said.

    Young pointed to another reason for questions about Chiron’s value. Novartis is particularly interested in Chiron’s vaccine arm, and the vaccine market is facing a period of increased competition, according to Young.

    Chiron’s vaccine business lost revenue to manufacturing problems during the last two flu seasons. But Morningstar analyst Jill Kiersky predicted in an April 4 report that the vaccine arm will bounce back.

    “[T]he vaccine should be a major contributor to the company’s bottom line in the future, given the strong demand for flu vaccines and limited suppliers,” she wrote.

    Kiersky noted that if the Novartis acquisition goes through as predicted, no flu vaccine manufacturers will be based in the United States.