BUSINESS

Valeant Pharmaceuticals in bidding war for Obagi Medical after boosting offer

04/03/2013 12:20 EDT | Updated 06/03/2013 05:12 EDT
MONTREAL - Valeant Pharmaceuticals raised its friendly offer to buy Obagi Medical Products after a rival bid from a German-based company.

The company (TSX:VRX) upped its all-cash proposal Wednesday to about US$418 million or US$24 per share from US$19.75 a day after Merz Pharma Group announced its bid of US$22 per share.

Valeant spokeswoman Laurie Little said California-based Obagi has a strong reputation in dermatologist and plastic surgeon dispensed products, which is a natural complement to Valeant's dermatology offerings.

"We will not chase this asset forever if it gets too expensive, but we do see a lot of value at this point," Little wrote in an email.

"In addition, we have international operations that we could introduce these products into. The acquisition would continue to build our presence in dermatology, an area of which we are very focused."

Obagi (Nasdaq:OMPI) said its board of directors unanimously approved the amended offer from Valeant and recommended that shareholders tender to the new offer.

The expiration date for the new offer remains unchanged at midnight eastern time April 23 and is conditional on a majority of Obagi shares being tendered.

The new bid represents a 56 per cent premium from Obagi's closing price on March 19, a day before Valeant's initial offer was announced.

In a letter to Obagi's board, Merz Pharma GmbH chief executive Philip Burchard said he was "surprised" and "disappointed" by the announcement of the initial deal with Valeant given that it had been engaged in ongoing talks since January about a potential transaction.

"Unfortunately, we were not made aware that Obagi was contemplating signing a deal with another party on an accelerated timeframe and were never asked for our best and final bid or provided a bid date by which you were going to collect bids from other parties," he wrote on Tuesday, prior to Valeant's higher bid.

"Nonetheless, we remain resolute in our objective to acquire Obagi."

The company hasn't countered Valeant's offer and didn't immediately respond to requests for comment.

Burchard said Obagi is "a natural fit for Merz" because of its own injectable products, adding that the combination would expand its U.S. market presence and diversify its dermatology portfolio by adding additional quality skin care options.

Analyst David Krempa of Morningstar said Valeant may have an aversion to bidding wars, but the company's increased bid is warranted.

"Obagi would be a great fit with Valeant's business and further increase its presence with plastic surgeons; however, we would be surprised to see Valeant go above this price if Merz again tops its offer," he wrote in a report.

He said the deal would add about 10 cents per share to his 2014 earnings estimate of $6.45 for Valeant, or less than a two per cent increase.

Krempa believes Valeant can surpass its estimate to reduce $40 million in annual costs, given its experience with two similarly-sized acquisitions — Dermik and Ortho Dermatologics.

However, he said the deal highlights Valeant's increasing challenge to acquire public companies at attractive prices.

"We believe the firm has in part been a victim of its own success. Due to its record of highly successful value-creating acquisitions, the firm's targets come under increased scrutiny," he said.

Krempa said Valeant's reputation of cost-cutting drives some companies to seek more employee-friendly alternatives, but it also convinces other strategic buyers to bring in competing offers.

The Merz Group employs 2,391 people around the world and generated about $1.2 billion of revenues in its most recent fiscal year. Founded in 1988, Obagi earned US$16.6 million on US$120.7 million of sales last year.

Valeant, formerly Biovail Corp., develops, manufactures and sells a broad range of pharmaceutical products primarily in the areas of dermatology, neurology and branded generic drugs.

Obagi's shares gained more than 10 per cent in Wednesday trading, rising $2.33 to US$25.21 on Nasdaq. On the Toronto Stock Exchange, Valeant's shares fell $2.31 or three per cent, to C$74.17.