Matrixx, H.I.G. Negotiated Deal For Nearly A Year, SEC Filings Show

Records filed in connection with Matrixx Initiatives' pending sale to H.I.G. Capital show the deal was nearly a year in the making.

As Matrixx completes regulatory steps to close H.I.G.'s acquisition, it also prepares to argue a case Jan. 10 before the Supreme Court that could affect the number of securities actions brought against pharmaceutical companies. In a 2004 complaint, Matrixx shareholders argued the company should have disclosed adverse event reports about Zicam cold remedies (Also see "Matrixx Misled Shareholders About Zicam Problems, Investors Allege" - Pink Sheet, 15 Nov, 2010.).

Securities and Exchange Commission records indicate H.I.G.'s agreement to acquire Matrixx for $8 per share, approximately $75.2 million total, came after the private equity firm approached Matrixx in January 2010.

The Dec. 22 Initial Solicitation Statement filing also shows H.I.G.'s offer was not the first time Matrixx pursued a sale. The Scottsdale, Ariz., firm shopped for buyers more than three years before withdrawing its Zicam intranasal gel and swab, but two years after shareholders sued about the firm's failure to disclose information related to the zinc-containing products.

Browsing For Buyers

In early 2006, shortly after the settlement of most of then-pending product liability litigation, the Matrixx board of directors established a strategic planning committee to assess interest in a possible sale ("Matrixx settles Zicam suits," "The Tan Sheet" Jan. 23, 2006, In Brief).

But no discussions advanced beyond a preliminary stage, which Matrixx attributed to "legal and regulatory concerns" associated with the business.

Matrixx continued the process through 2007, receiving feedback from potential buyers that "focused, in part, on their concerns about the homeopathic nature" of the firm's primary products.

By 2008, however, Matrixx's fortunes had turned and the board focused on other strategic options, including acquiring OTC health care products.

The firm's outlook changed again after June 2009, though. Matrixx received a warning letter from FDA about Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs the same day the agency warned consumers not to use the products (Also see "FDA Uses "Unusual" Action To Get Matrixx's Zicam Off The Market" - Pink Sheet, 29 Jun, 2009.).

Zicam Recall Had "Material Adverse Impact"

The recall of the products – which accounted for 40% of the company's net sales – "had a material adverse impact" on Matrixx's business, the SEC records state. In addition to being the main sales driver, the products were sufficiently unique to defend against private label competition.

After FDA's action, lawsuits inundated Matrixx, sales dropped precipitously and the firm again sought buyout offers. In January 2010, an H.I.G. representative suggested a possible buyout and in February H.I.G. offered $6.50 per share in a transaction not subject to a financing contingency.

Matrixx's board members in March decided to follow a post-offer go-shop bid process, which allowed the firm to solicit other bids after announcing H.I.G.'s offer.

When the board in May discussed the company's business – evaluating outstanding litigation, the regulatory environment, the seasonal nature of Matrixx product sales, the product pipeline and private label competition – members instructed financial advisors to continue to engage with H.I.G. while calling the $6.50 offer insufficient.

Matrixx also requested an agreement to prohibit H.I.G. from backing out of the deal "due to deterioration of the business, financial condition or results of operations of [Matrixx] as a result of litigation pending or threatened as of the date of signing (including any regulatory proceedings) or similar litigation proceedings initiated after signing."

Overcoming Litigation Risk

Additional negotiations continued through the fall, with H.I.G. eventually increasing its offer to $8 per share, but also telling Matrixx it "wanted to obtain assurances regarding the litigation risk." The private equity firm outlined acceptable terms for settlement of the Zicam-related personal injury claims.

Matrixx had previously attempted to settle economic injury complaints, another area of pending litigation (Also see "Matrixx Trims Zicam Litigation Load To Focus on Personal Injury Claims" - Pink Sheet, 23 Aug, 2010.).

On Dec. 3, the firm gave H.I.G. details on terms of a draft litigation settlement agreement through which Matrixx hoped to settle claims by "substantially all of the plaintiffs and claimants who have alleged personal injury claims."

The two parties continued to work out an agreement and eventually announced the deal Dec. 14 (Also see "Matrixx Bought By Private Equity Firm H.I.G., Settles Personal Injury Lawsuits" - Pink Sheet, 20 Dec, 2010.).

H.I.G.'s tender offer expires Jan. 24, unless terminated earlier. The companies Dec. 29 said they cleared a regulatory hurdle when the Federal Trade Commission granted early termination of the mandatory waiting period under the Hart-Scott-Rodino Antitrust Improvements Act.

By Carolyn B. Phenicie