Advanced Medical Optics (AMO; Santa Ana, California) surprised many on the Street lasat week with its 11th hour $4.3 billion offer for larger eye care rival Bausch & Lomb (B&L; Rochester, New York).
Even though AMO had hinted that it might make an offer for B&L back in May (Medical Device Daily, May 25, 2007), the bid still came as a bit of a surprise, given AMO's costly recall of its Complete MoisturePlus contact lens solution initiated less than five days after it dropped that hint (MDD, May 30, 2007).
Last week AMO told analysts that it forecast a loss as high as $1.15 a share on sales of $1.05 billion to $1.07 billion this year because of the recall, a marked decrease from the previous forecast of earnings up to $1.55 a share on sales as high as $1.18 billion.
While the $75-a-share offer trumps Warburg Pincus' $3.67 billion offer which values the shares at $65, there are significant differences in the two offerings that make an apples to apples comparison impossible.
For starters, AMO's offer consists of a significant stock component. Each B&L share would be exchanged for $45 in cash and a fixed number of AMO common stock having a value of $30. In contrast, the Warburg Pincus offer, which would take B&L private, would be an all-cash transaction.
AMO's offer came on the last day of B&L's "go shop" period in its agreement with Warburg Pincus. After that 50-day period, B&L would not have been able to solicit higher bids for the company. If the offer is consummated, AMO will have to pay Warburg Pincus a $40 million breakup fee, or about 1% of the transaction price, a bargain when compared with typical breakup fees that run to 3% or more of the transaction value.
AMO said the cash consideration has been fully committed by Goldman Sachs and will be financed using a combination of bank and public debt. It said that the combined company's leverage at the time of closing will be in line with its pro forma leverage at the time of the closing of the $808 million buy of IntraLase (Irvine, California) in April (MDD, April 7, 2007).
B&L's board said in a statement that it has determined that the AMO proposal "is reasonably likely to result in a superior proposal, as defined in the Warburg Pincus agreement."
Jim Mazzo, president/CEO and chairman of AMO, said, "We look forward to working with [B&L] to reach a definitive agreement as soon as possible and believe our bid represents a strategically and financially superior proposal to B&L's existing merger agreement."
AMO's terms include that AMO will have up to year to close the transaction and that interest would be paid in cash with respect to the purchase price by AMO at 7.2% a year, beginning six months after a definitive agreement is executed.
The offer also includes a proposed $130 million reverse termination fee payable by AMO to B&L in the event the transaction fails to close due to the failure to obtain financing or antitrust clearance and proposed reimbursement by AMO of B&L's expenses up to $35 million if AMO fails to obtain the approval of its shareholders.
Analyst response to the deal was largely lukewarm, given concerns that an overlap in eye care products could trigger antitrust questions.
Additionally, B&L is itself just starting to recover from a global recall of its ReNu with MoistureLoc contact lens solutions after it was linked last year to a fungal infection that can cause blindness (MDD, May 16, 2006). It also has been hamstrung by various accounting issues that has prompted a restatement of past results. It became current in its financial filing obligations with the Securities and Exchange Commission again on June 19.
Jefferies & Co. analyst Peter Bye said he didn't think that B&L will provide AMO shareholders long-term value. "Bottom line, we believe the combination of two struggling businesses does not equate to a compelling growth story," he wrote in a research note.
AMO said it is "confident" that it would be able to resolve antitrust issues, but BMO Capital Markets analyst Joanne Wuensch cited overlaps in the two companies' contact-lens solutions, cataracts and refractives businesses. "We believe that the company would need to spin out one of the contact-lens solutions businesses," she said in a note to clients. "The question is which one of the franchises, given that they both have had recalls?"
Bear Stearns analyst Rick Wise said that he believes in order for AMO to have a chance to close the deal, it will have to sweeten the cash component of its offer. "We think [AMO] could use an equity partner in order to finance the stock portion of the deal.
He said his firm remains neutral on the offer, "given the number of unknowns going forward." He added that while acquiring B&L would be advantageous for AMO and that the addition of a pharma and contact lens business would help to improve cash flow which was significantly reduced following the Complete MoisturePlus recall, taking on at least $2.5 billion in debt (via the current offer) could limit its financial flexibility over the next several years.
AMO said that the deal will enable it to enter the contact lens market and give it a stronger position in a better known lens care solutions brand to go with its surgical implants and laser equipment.
"This is a truly unique opportunity that would enable AMO to accelerate our strategic goal of providing a full range of advanced technologies to address the vision needs of patients of all ages," said Mazzo. "I am confident that delivering on this strategy will allow us to generate significant value for shareholders and create new opportunities for our combined employee base. Through a focus on integrating the best of both businesses, as well as the sale of some non-core assets, our goal is to create a stronger, more competitive combined company with a platform for sustained, profitable growth."