Leading shareholders continue to trade blows with Charles River Laboratories (CRL) over the US-based contract research organisation’s planned US$1.6 billion acquisition of China’s WuXi PharmaTech.
JANA Partners, CRL’s largest shareholder and an early opponent of the deal, has sent the company a detailed critique of the revised investor presentation made by Charles River earlier this month in an effort to drum up support for the acquisition. A special meeting of Charles River shareholders to vote on the proposal has been scheduled for 5 August, while WuXi will go to its shareholders on the same day.
In its updated presentation, CRL claimed “overwhelmingly positive” support from leading pharmaceutical and biotechnology clients for the combination with WuXi. It also forecast annual revenue synergies of at least US$75 million to US$100 million by 2013 from the deal.
JANA Partners remains unconvinced. Indeed, the updated investor presentation makes it “more apparent than ever that this transaction is the wrong choice for Charles River shareholders”, the hedge fund contends.
In a letter to CRL president and chief executive officer James Foster, managing partner Barry Rosenstein says the projected synergies “remain speculative at best”.
Recent discussions with industry operators have confirmed that “such synergy claims cannot be reconciled with practical industry dynamics, including the complexity in terms of time and location of the R&D process”, he writes. For example, WuXi’s discovery chemistry offering “is too early in the process to lead to significant cross-selling with Charles River’s toxicology”.
These discussions have also strengthened JANA’s belief that most large customers are “not typically suited” to purchasing an integrated offering, due to their “often highly decentralised processes”, which may be divided among different decision-makers located in different facilities, cities or even countries, “further complicating the sales process”.
And it is “not realistic” to ask CRL’s existing sales force to sell an additional and entirely new offering (WuXi’s discovery chemistry) to a new set of decision-makers and “still cover their existing markets”, Rosenstein maintains. It is “even less likely” that Charles River can generate the claimed revenue synergies, plus anticipated sales and marketing cost synergies, “when WuXi is contributing only a limited sales force”.
JANA is also convinced that any integrated discovery and toxicology sales would likely come at the expense of pricing, “thus reducing the value of any such potential revenue synergies, with potentially further revenue erosion resulting from Charles River’s and WuXi’s different pricing models”.
Excessive premium
Rosenstein goes on to attack the proposed acquisition on the grounds that the “excessive premium” involved would result in “highly inadequate” returns.
He also argues that CRL’s track record of capital allocation, in particular the ill-considered $1.5 million acquisition of Inveresk Research Group in 2004 and subsequently expensive efforts to build up CRL’s preclinical research business, “does not inspire confidence”.
Moreover, there are “far more promising” avenues for creating shareholder value, including a share repurchase, selling off Charles River, or splitting up its component parts, Rosenstein suggests.
Ratcheting up the pressure on CRL even further is a Reuters interview with Glen Welling, principle and managing director of another dissident shareholder, Relational Investors.
According to Welling, Relational has told CRL it should appoint two major shareholders to the board and consider a share buyback. Failing that, Relational will nominate its own slate of directors, whether or not Charles River proceeds with the planned acquisition of WuXi.
“We haven’t seen any proof that this board knows how to allocate capital,” Welling is quoted as saying.
