Charles River Laboratories International Inc. (NYSE:CRL) responded to its largest shareholder’s protest about a proposed merger with Shanghai-based WuXi PharmaTech (Cayman) Inc. (NYSE:WX), saying the deal was too good to pass up.
In a letter to Jana Partners Inc. managing partner Barry Rosenstein, CRL CEO James Foster wrote that the hedge fund’s view of the proposed deal’s "strategic business benefits and attendant shareholder value proposition" are at odds with his company’s.
Foster wrote that WuXi’s organic revenue growth rate, which exceeded 40 percent over the last three years, makes it one of the fastest-growing contract research organizations in the world. That growth would increase the value of CRL’s shares, he wrote. Foster also noted that WuXi is China’s largest CRO, writing that he believes that the increasing tendency to outsource R&D by pharmaceutical and biotechnology companies represents a significant growth opportunity.
The proposed $1.6 billion buyout would also increase long-term top- and bottom-line growth for CRL, compared with doing nothing or a buyback of shares as Rosenstein suggested in his June 7 letter to Charles River protesting the deal.
WuXi, Foster wrote, also remained profitable as it acquired Philadelphia-based CRO AppTec and increased its toxicology and manufacturing businesses. Foster said the company’s profitability will increase post-merger, as its investments mature and because labor costs in China will remain "significantly lower when compared to developed countries for the foreseeable future."
The combined companies’ clients, which are seeking a broader service offering, responded positively to the proposed merger, Foster added, ending the letter with the assertion that the lack of overlap between his company and WuXi would make integration easier.
One of Jana’s main concerns is the low share price of Winchester, Mass.-based Charles River. The low valuation would give WuXi a disproportionately large share of the combined companies — equaling a nearly 27 percent stake at CRL’s current price of around $32.44 a share, Rosenstein wrote.
And although the CRO industry will likely bounce back from the recession, Rosenstein suggested that if Charles River did not go through with the deal it would regain some traction. Foster countered that growth would be faster after the WuXi merger.