Charles River Laboratories International Inc. (NYSE:CRL) will leave WuXi PharmaTech (Cayman) Inc. (NYSE:WX) at the altar and take its $1.6 billion dowry with it, after failing to convince shareholders that the union was in the best interest of the company.
The Wilmington, Mass.-based contract research organization said it has agreed to terminate the proposed deal and will pay a $30 million break-up fee.
“We believed that this transaction, which would have created the premier early-stage contract research organization, would have resulted in long-term strategic benefits for our business and our shareholders,” president and CEO James Foster said in a prepared release. “We also value our stockholders’ views and given their concerns about the proposed transaction, and our commitment not to proceed without their support, we have decided that terminating the transaction is the appropriate action to take.”
CRL first announced the proposed merger with Shanghai-based WuXi in late April. At the time, CRL officials said the acquisition would boost the company’s drug development from molecule creation to first-in-human testing.
The merger called for CRL to pay $21.25 per WuXi American depositary share (each of which is worth eight ordinary WuXi shares), a 38 percent premium on WuXi’s 30-day average closing price of $15.45.
But the deal quickly earned the scorn of a group of CRL’s top institutional shareholders, particularly New York-based private investment fund Jana Partners LLC, which owns a 7 percent stake in the company and led the charge in opposing the deal.
In a June 7 letter to company officials, Jana managing partner Barry Rosenstein said he had “serious doubts about the wisdom of pursuing the transaction.”
In particular, Rosenstein said Charles River’s current low share price would give WuXi a disproportionately large share of the combined companies, equaling a nearly 27 percent stake at CRL’s then-stock price of around $32.44 a share.
According to securities ownership documents filed June 7, Jana bought nearly 4.7 million CRL shares over eight sessions ended May 26, paying between $31.88 and $32.67 a share. Rosenstein met with CRL CEO James Foster and WuXi CEO Ge Li June 3 to discuss their strategic rationale and to detail Jana’s reasons for opposing the merger.
“Not surprisingly in light of these facts, many Charles River shareholders have already expressed their displeasure with the proposed acquisition by disposing of their stock,” Rosenstein wrote, later asserting that the deal likely would be voted down.
Foster fired back on behalf of CRL management just a week later, writing 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.
However, his actions failed to halt growing opposition and two more top investors came out against the deal, calling it too risky.
Neuberger Berman LLC, in a June 16 letter to CRL’s board of directors, said the merger was not in the best interest of CRL’s shareholders; Relational Investors LLC warned the company that its directors could be forced off the board by shareholders angered at the deal.
“Between the stock price reaction and shareholders’ disapproval, it should be clear to management and the board that walking away from this transaction is the right thing to do,” Relational principal and managing director Glenn Welling told the Reuters news service. “We hope they get the message.”
“Without belaboring the point and put simply, the very rich price being paid for WuXi allows for no margin of error. In our opinion, the proposed transaction with WuXi represents an unacceptable elevation of financial and operational risks to CRL, and therefore, our investment,” added Neuberger Berman, according to a regulatory filing.
The growing revolt moved CRL management to launch a full on public relations push to tout the deal’s merits in early July.
On July 13, Foster said in prepared remarks that the deal would create "significant additional shareholder value" and the world’s first fully integrated global early-stage contract research organization. The annual revenue synergies are expected to drive "incremental operating income" of between $20 million and $30 million, according to the presentation, and the deal "enhances top-line growth potential" by 200 basis points. The total annual pre-tax cost synergies are expected to be $20 million, according to the presentation.<
Foster also cited "overwhelming support" from Charles River Labs clients for the deal, quoting senior research executives at two top-five pharma companies and one "top tier" biotech firm.
CRL’s case to shareholders was seemingly bolstered when two proxy advisory firms issued reports recommending approval of the deal and the FTC granted the companies more time to close the merger.
However, the push apparently did little to stop the drumbeat of opposition and with the August 5th shareholder meeting to vote on the deal approaching, CRL management pulled the deal off the table and canceled the shareholders meeting for next week.
In a related note, CRL officials also announced that they have initiated a $500 million stock buyback plan.
