Bidding for generic stake?

Sanofi-aventis, PPF on verge of bidding war for Czech generic drug maker Zentiva

Chris Anderson
PARIS—Speculation that a bidding war will ensue continued early this month, after an announced takeover bid of Czech generic drug maker Zentiva by closely-held investment company PPF for 950 Czech Crowns (CZK)  was trumped in late June by French pharma giant Sanofi-aventis's competing bid of CZK 1,050 or roughly $2.6 billion.

Meanwhile market speculators have all but signaled their anticipation of a bidding war, sending shares of Zentiva to more than CZK 1,100—higher than both offers on the table. Zentiva management may also be expecting one or both companies to up the ante, as it urged its shareholders to take no action on the Sanofi bid for the time being while also advising shareholders not to accept the smaller PPF bid, which a company press release stated was "opportunistic in its timing."

That opportunity has sprung from a marked retreat from just a year ago, when Zentiva shares were trading for more than CZK 1,400. According to Zentiva officials, the prospects for 2008 are strong and the current share is the result of "two unscheduled, and for the Czech market, unprecedented trading statements in 2007" which have negatively impacted share price.

These short-term struggles included higher-than-expected costs associated with Zentiza's acquisition of Turkish firm Eczacibasi, as well as marked decline in revenue from Romania, which was impacted, in part, by the strength of Czech currency.

Both PPF and Sanofi already own a sizable portion of Zentiva. PPF bought in roughly three years ago and owns just over 19 percent of the company, while Sanofi's share in the company is just shy of 25 percent.

Commenting in a Reuters story on the proposed offer by Sanofi, Milan Vanicek, an analyst with Czech stock dealer Atlantik FT, thinks PPF won't be inclined to accept the Sanofi offer for its shares.

"If you look at for how much PPF bought their stake, that bid still seems too low," Vanicek says, noting that PPF made its investment in Zentiva in 2005 at 1,025, only slightly lower than the Sanofi offer.

For its part, Sanofi may be looking to Zentiva as part of a broader strategy to even out its revenue stream.

"Sanofi-aventis is already established in the various markets where Zentiva operates. The intended acquisition of the control of Zentiva carries a strong strategic rationale," the company noted in a public statement announcing its bid.

While it did not disclose exactly what the strategic rationale is, it's not hard to speculate that Sanofi may be looking to the generics market to diversify its business and insulate it somewhat from declining revenue in its core business.

"Sanofi doesn't really have much right now in terms of its generics arm," says Bram Buring, at Czech-based investment banking firm Wood & Co. in a report published on Bloomberg.com. "This might signify that they are truly interested in building their generics business."

That wouldn't make it the first large pharmaceutical company to take that approach. Sanofi's bid came only a week after Tokyo-based pharma Daiichi Sankyo announced its intent to buy a controlling stake in Indian generics company Ranbaxy for $4.6 billion.

A Sanofi spokesperson noted in published reports that the company expected the acquisition of Zentiva to be accretive to earnings from the first year of the integration, despite recent earnings disappointments.

In a procedural move, aimed at clearing the way for a potential Sanofi buyout, Zentiva announced the termination of a shareholder agreement between certain members of Zentiva and Sanofi-aventis Europe, which restricted the ability of Sanofi to buy certain management shares.

PPF officials were said to be mulling a higher offer, something that seemed more likely as investment firm J&T, holder of a 7.2 percent stake in Zentiva, said it would not accept PPF's original bid.

An extraordinary shareholders' meeting was scheduled to take place earlier this month, to discuss, but not vote on the PPF offer and, presumably the counter offer by Sanofi-aventis. The meeting is required by Dutch law where Zentiva shares are registered for public trading. DDN

Chris Anderson

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