Medical Device Daily Associate
The arms race for Guidant (Indianapolis) continued to escalate over the weekend and spilled into uncharted territory this week, with an offer that topped the original December 2004 price for the company.
Late on Friday, original suitor Johnson & Johnson (J&J; New Brunswick, New Jersey) retooled its offer for Guidant for the fourth time, upping its offering price from $68 to $71 a share for a total of about $24.2 billion. Guidant's board accepted the offer even though it was less than the $24.8 billion ($73 a share) that latecomer Boston Scientific (Natick, Massachusetts) offered Thursday evening, with the $675 million termination fee that Guidant would have to pay J&J to take the Boston Sci offer largely offsetting the difference in the prices.
Instead of folding, Boston Scientific put on its best poker face yesterday and went “all in,“ raising its bid for the recently struggling implantable cardiovascular products company to an eye-popping $27.2 billion, or about $80 a share.
Boston Sci gave Guidant a deadline of 5 p.m. EST yesterday to accept the offer as “superior“ to J&J's, saying the offer would otherwise be withdrawn.
Guidant issued a statement late Tuesday afternoon, saying that its board had determined that the latest Boston Sci offer was indeed superior to the terms of the company's current merger agreement with Johnson & Johnson.
The company said that under its agreement with J&J, it must wait five business days, or until Jan. 25, before it may change its recommendation of the Johnson & Johnson merger or terminate the agreement with J&J and enter into a merger agreement with Boston Scientific.
It said Boston Sci's latest offer would “remain open for acceptance by Guidant until 4 p.m. on January 25.“
The new offer eclipses J&J's original December 2004 $76 a share ($25.4 billion) offer and raises questions about whether J&J would be willing to pay even more than it originally offered for the company, particularly in light of the fact that just two months ago it had dickered the price down to $64 a share (Medical Device Daily, Nov. 16, 2005) amid what it said were concerns over potential litigation and regulatory overhangs in Guidant's cardiac rhythm management business.
“Our $80 per share offer for Guidant is compelling,“ said Pete Nicholas, chairman of Boston Scientific, which only entered the merger fray last month, in a prepared statement. “We are providing Guidant shareholders with certainty of completion, significant upside potential and substantially more value today than the Johnson & Johnson transaction. By any objective measure, our offer is clearly superior to Johnson & Johnson's.“
Under the new offer, Guidant would receive $80 per share, including $42 per share in cash and $38 per share in Boston Scientific common stock.
Boston Sci's offer represents a premium of roughly $3.3 billion (or $9 per share) over the current purchase price proposed by J&J and gives Guidant shareholders a roughly 36% ownership in the combined company if the merger is completed.
While several analysts have said that raising the offer above $78 a share could put Boston Sci's investment credit rating at risk, the company said it has found a solution to this problem, with the richer offer being funded, in part, by Abbott Laboratories (Abbott Park, Illinois), which has agreed to increase the amount of money it will pay for the Guidant's vascular and intervention businesses as part of Boston Sci's formal offer for Guidant to allay regulatory concerns over the merger.
Under the terms of the amended agreement, Abbott would pay Boston Scientific $4.1 billion up from $3.8 billion to acquire Guidant's entire vascular business on or around the closing of Boston Scientific's acquisition of Guidant.
Abbott also would pay Boston Scientific milestone payments of $250 million after FDA approval of Guidant's drug-eluting stent, and an additional payment of $250 million upon a similar approval in Japan. Abbott also would provide Boston Scientific with a five-year, $900 million interest- bearing loan (up from $700 million in the original agreement).
Abbott also has agreed to purchase $1.4 billion of Boston Scientific common stock (about 56 million shares), contingent upon the closing of the Guidant acquisition. That would represent a roughly 4% stake in the combined company.
Boston Sci said the revisions to the Abbott deal would give it $6.4 billion in cash from Abbott around the time its proposed Guidant acquisition could close. Under its previous bids for Guidant, Boston Scientific has said it would have to borrow about $9 billion to conclude a deal.
While acknowledging that Boston Sci is likely pushing the limits in its offering process, med-tech analyst Joanne Wuensch of Harris Nesbitt (New York) appeared to agree with the company that it would be able to maintain its credit rating even at this new price, writing in a research report that “the infusion of cash and support from Abbott increases our comfort in the affordability of the offer. Further, our preliminary analysis shows that Boston Scientific will be able to sustain its investment grade rating given the change in the Abbott agreement. While facing near-term risks, we believe the new offer given the increased relationship with Abbott still makes sense given the potential for the combined entity.“
The new offer also provides Guidant shareholders with additional certainty of value, as Boston Scientific has adjusted the bottom of the collar around the stock portion of the merger consideration by $1 from $23.62 to $22.62. The top of the collar remains $28.86.
Unlike Boston Scientific's proposal, J&J's offer has already cleared U.S. antitrust review, which would speed the process toward closing a deal. Guidant shareholders are scheduled to vote on that proposal Jan. 31.