KODAK BIDS FRIENDLY $ 5.15 BIL. FOR STERLING: TAKEOVER FIGHT ENDS IN A PHOTO FINISH; GLENBROOK LABS VALUED AT $ 775 MIL. IN LOCKUP AGREEMENT
Kodak is spending more than twice its target price for a purchase in the drug industry to take Sterling out of the grasp of Hoffmann-LaRoche. Kodak announced a $ 5.15 bil. cash "white knight" offer at $ 89.50 per share on Jan. 22. The Kodak offer has the blessing of Sterling's management and board of directors and the acquiescence of Hoffmann-LaRoche. Besides topping the Swiss firm's last bid by nearly $ 500 mil., Kodak offers Sterling management the opportunity to protect the company from the ravages of consolidation with an established pharmaceutical business. Kodak has publicly stated its interest in establishing a drug business since 1985, and as recently as late October said it was willing to spend $ 2 bil. for a purchase. The Kodak offer for Sterling is worth $ 5.15 bil., or approximately 26 times projected net earnings for 1987. Roche's last offer of $ 81 per share for Sterling was worth approximately $ 4.66 bil., or 24 times projected net income for 1987. The high multiple of the Sterling deal could cool merger speculation in the drug industry. While several of the smaller drug companies are still vulnerable, some of the rumored U.S. majors would be priced out of the short-term takeover market. "Sterling's board of directors believes that this proposed merger will provide full and fair value for its shareowners," the company's chairman, John Pietruski, declared. "It is our belief that the match with Kodak is an excellent arrangement and we look forward to continued growth in our business. By joining forces with Kodak, we can build on that firm's growing pharmaceutical research base and other important resources to achieve a leading position in the pharmaceutical industry." Kodak has been actively building a pharmaceutical business since 1984 through in-house activities (Eastman Pharmaceuticals) and via equity/licensing agreements with R&D firms. Kodak noted that its pharmaceutical division will soon have INDs for "more than 12 clinical indications" for products in the company's pipeline. In February 1986, Kodak announced the establishment of its Pharmaceuticals Division under former Ciba-Geigy exec Paul Baehr. The company predicted at that time that it would become "a major factor in the pharmaceuticals market." However, its attempts to find an attractive partner among the second and third tier drug businesses have come up sour. Kodak's initial strategy was to build an active R&D pipeline through equity/licensing agreements. From 1984, beginning with ICN and Viratek, Kodak invested in a wide range of biotech, delivery system specialists, and small drug firms. Among Kodak's partners are Nova Pharmaceuticals, Enzon, Cytogen, Immunex, Amgen, and Cetus. The company has closed out equity investments in ICN (and its Viratek subsidiary) and Elan. In 1986, prior to ICN's trouble with FDA over Virazole promotion and the rejection of a ribavirin Treatment IND for AIDS, Kodak was rumored as a potential acquirer of ICN. However, Kodak's disenchantment with the company and ribavirin's progress led to divestment in March 1987 of Kodak's $ 8.8 mil. position in ICN and most of its $ 31 mil. position in Viratek. Those kind of rumors were helped along by Kodak Chairman Colby Chandler's pronouncement in June 1986 regarding Kodak's interest in the drug industry. He said that "there is a 100% probability that we will make an acquisition or acquisitions in the pharmaceutical industry." Kodak had set a $ 1 bil. sales goal in the health industry by the 1990's. With Sterling, Kodak will realize that goal ahead of schedule. Sterling's prescription drug business and OTC drug business each generated sales or approximately $ 360 mil. in the U.S. in 1987. In addition, foreign drug and OTC sales should add another $ 550-$ 600 mil. in sales, putting Sterling's worldwide health care business already well over $ 1 bil. "This merger immediately provides the worldwide drug registration and marketing infrastructure that we have sought to bring Kodak's discovery efforts closer to the marketplace," Chandler said. He indicated that Kodak plans to keep the OTC business. "In addition," Chandler noted, the Sterling acquisition "brings with it a successful over-the-counter drug business that is consistent with our long-term pharmaceutical strategy." Under the merger agreement, Sterling's U.S. OTC business, Glenbrook Labs, has been pledged to Kodak for $ 775 mil. as a lockup provision. Kodak also has obtained an option to purchase 10.5 mil. new Sterling shares directly from Sterling at $ 89.50 per share. Kodak also expressed an interest in keeping Sterling's household products business, Lehn & Fink. The merger, Kodak observed, provides it "with a well-managed household products business that includes many strong brand name products with market leadership positions. Many are sold through channels or distribution that we know quite well." A joint Jan. 22 press release announcing the merger notes that "organizationally, Sterling will operate as a subsidiary, reporting to [Kodak President] Kay Whitmore. Management from the two firms will work together to combine each firm's pharmaceuticals capabilities to achieve the best use of their total resources." In a display of deep pockets and determination, Roche had twice raised its bid for Sterling during the week of Jan. 18-22: from $ 72 a share to $ 76 on Jan. 18; and again on Jan. 20 to $ 81 a share. The latter offer represented a $ 500 mil. increase over the previous bid to about $ 4.66 bil. "We view Sterling as a fine company that would have made an excellent fit with Hoffmann-LaRoche," Chairman Fritz Gerber stated in a Jan. 22 press release. "We offered what we believe is a fair price. The price agreed upon by Sterling and Kodak does not fit with our investment criteria. We will both companies success in their future endeavors." Last week, Sterling had reported to shareholders that it had "explored in detail and conducted discussions with a number of persons concerning the feasibility of various alternative transactions." Sterling reported that "negotiations have been undertaken and are currently in progress concerning a possible acquisition of the entire company." Sterling's management and board of directors had rejected Roche's initial offer but had not commented on either of the two sweetened bids. However, the company had indicated that it was preparing to fight it out with Roche in court and in the federal government rather than capitulate. Sterling filed a lawsuit against Roche Jan. 11 in federal court in Delaware alleging disclosure violations and involvement in illegal insider trading ("The Pink Sheet" Jan. 18, T&G-2).
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