08/10/2011 04:26 EDT | Updated 10/10/2011 05:12 EDT

Paladin Labs' Afexa Sciences Hostile Takeover Bid Worth $56.7 Million

Flickr: Bopuc

MONTREAL - Specialty drug company Paladin Labs Inc. (TSX:PLB) is making a hostile offer to buy Cold-FX flu remedy maker Afexa Life Sciences Inc., expecting the product to help increase sales of its over-the-counter medications.

The cash-or-shares bid, taken straight to shareholders after talks with Afexa management broke down, values the company at $56.7 million.

"We have a whole portfolio and growing portfolio of products that we think if we add Cold-FX to this line, we would be very successful," vice-president and co-founder Mark Beaudet said Wednesday.

Beaudet said Paladin's over-the-counter business has grown by 159 per cent and has more than $20 million in sales.

Paladin has nine non-prescription medications including children's fever reducer Tempra, teething product Anbesol, anti-diarrhoea relief Kaopectate, the sleep aid Unisom and the emergency contraceptive Plan B, he said. It doesn't currently have any anti-cold remedies.

Beaudet called Cold-FX a "great Canadian brand," adding, "We think it will work well with our existing sales and marketing infrastructure."

The remedy has been promoted by Olympic figure skating champion Joannie Rochette and TV personality and former NHL coach Don Cherry.

Paladin, which already holds about 15 per cent of Afexa stock, said Wednesday it will pay 55 cents per share to acquire the rest of the Edmonton-based company, a premium of 16 per cent to the closing price of Afexa shares on Tuesday.

"It's a great opportunity for investors to liquidate their position in a stock that is very thinly traded," Beaudet said.

Afexa's board said in a written response that it believes the Paladin offer "significantly undervalues Afexa's business." Afexa (TSX:FXA) has set up a special committee to conduct a review and report within 15 days, urging shareholders not to tender to the bid.

Those tendering shares to the deal have the option of accepting 0.013 of a Paladin share for each Afexa share, based on a price of $43.14 per Paladin share.

Desjardins Financial analyst Pooya Hemami said Paladin has a growing presence in over-the-counter medications that Afexa would help to build.

"This acquisition would strengthen the company's critical mass in the segment and could add leverage with its wholesalers," Hemami wrote in a research note.

But Hemami said Paladin may need to raise its bid price in order to get the consent of Afexa's board and avoid dealing with the company's shareholders' rights plan.

"As no alternative suitor has emerged (to our knowledge) since Paladin first indicated its beneficial interest, we believe it is unlikely that a competing offer will be made. Hence, we anticipate that Paladin may eventually be successful in its bid although it may need to raise its bid price if it wishes to get the board's consent and/or avoid having to contend with the rights plan."

Paladin said that negotiations following its purchase in July of Afexa shares did not result in a deal and it was apparent "there was little prospect of one being completed on a timely basis."

"Our offer provides an opportunity for Afexa shareholders to receive an immediate and attractive cash premium for their investment at a time when the outlook for Afexa is uncertain," added Paladin president and CEO Jonathan Ross Goodman in a statement.

The deal is open until Sept. 15 but will require regulatory approval but will have to contend with a Afexa's shareholder rights plan.

Shares in Paladin were up $1.95 or about five per cent to $41.95 in late afternoon trading on the Toronto Stock Exchange. Afexa shares gained 8.5 cents or 18 per cent to 56 cents.

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