A proxy voting advisory service is recommending that shareholders approve the proposed, $1.6 billion merger of Charles River Laboratories International Inc. (NYSE:CRL) and WuXi PharmaTech (Cayman) Inc. (NYSE:WX).
PROXY Governance Inc.’s report on the deal urges shareholders to approve the issuance of stock necessary to complete the acquisition and to postpone a final vote on the deal so that CRL can drum up more proxy support.
"We support the acquisition given the compelling strategic arguments behind the deal and vocal client support for the transaction," the advisory frim wrote in its report, according to a press release. "While the offer price appears high…we recognize that it is difficult to ascertain an appropriate value given that Charles River is seeking to acquire the strongest player in a unique competitive space and that there are no close precedents in terms of premiums offered… Also, we believe that over the long run, the proposed acquisition will likely provide greater shareholder value than the proposed share buyback advocated by opponents to the deal."
The press release is Wilmington, Mass.-based CRL’s latest move to bolster support for the merger, which has drawn considerable flak from some of its top backers since it was revealed April 26. This week the company pushed back against opposition from some of its top shareholders. Aiming to drum up more support for the acquisition, the company issued a revised investor presentation summarizing the deal and its benefits — including an estimated $75 million to $100 million in annual "revenue synergies" — and highlighting positive reactions from its clients.
The deal first met with stiff opposition from New York-based hedge fund Jana Partners Inc. and managing partner Barry Rosenstein. In a June 7 letter to company officials, Jana managing partner Barry Rosenstein said he had "serious doubts about the wisdom of pursuing this transaction at this time." 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 price of around $32.44 a share.
Charles River Labs was quick to defend the deal. CEO James Foster wrote that the buyout would increase long-term top- and bottom-line growth for CRL, compared with doing nothing or the share repurchasing plan favored by Jana.
Two other institutional investors, Neuberger Berman LLC and Relational Investors LLC, failed to buy into those arguments and also chimed in with their objections.
"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.
Citing Charles River’s 2004 buyout of Inveresk for $1.5 billion, which was plagued by integration difficulties and saw CRL sell off significant portions of the acquisition just two years later, the investment firm said it was "perplexed" that CRL would embark on another, massive acquisition.
"The Inveresk transaction was also billed as transformational, promising to accelerate the growth and size of available markets to the company. Instead, the transaction resulted in a $700 MM write-off with growth and consistent profitability remaining elusive in the company’s pre-clinical operations," Neuberger Berman wrote, according to the filing. "CRL’s management needs to demonstrate that its current assets can generate returns well in excess of its cost of capital before being allowed to spend $1.6B of capital. We firmly believe that that the CRL’s shares are significantly undervalued and that a bright future lies ahead for the core businesses of CRL. In our view, a free cash flow financed share repurchase program would demonstrate confidence in CRL’s current asset base and be an excellent use of capital."
Yesterday, the Federal Trade Commission asked both companies for more information on the deal, requesting more data on their viral clearance services, cell line characterization services and lot release testing services businesses.