Relational Investors LLC, which owns 4 percent of Charles River Laboratories International , has warned the company that its directors will likely be booted off the board by angry shareholders if it proceeds with its plan to acquire Chinese contract research organization WuXi PharmaTech for $1.6 billion.
Relational, which manages more than $6 billion in assets, joins hedge fund JANA Partners LLC and asset manager Neuberger Berman LLC in opposing the transaction, which Charles River, a provider of animals to drug companies for clinical research, says will expand its portfolio of products and services and give it a leading presence in China.
Shareholders who oppose the deal argue Charles River is paying too much. On the day of the announcement, on April 26, the company's shares fell nearly 17 percent, wiping some $400 million from its market value.
That suggests investors consider a more reasonable price to be in the $1.2 billion range.
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, said Glenn Welling, principal and managing director at Relational, in an interview. We hope they get the message.
Executives from Charles River were not immediately available for comment. But in an interview on Tuesday, CEO James Foster said he had met with all his major shareholders and a vast majority of them are quite comfortable with the deal.
Foster said the price is justified and will achieve cost synergies. More importantly, we will see a substantial amount of revenue synergies that would not have been achievable without this deal.
Under the agreement, Charles River will pay $21.25 for each American Depository Share of WuXi, which provides discovery and preclinical development services for biopharmaceutical companies.
Charles River has said it plans to finance the cash portion of the deal through cash on hand and one or more sources of new debt financing. The company has received a commitment for a $1.25 billion credit facility from J.P. Morgan chase and Bank of America Merrill Lynch.
WuXi shareholders would receive $11.25 in cash, and $10 a share in stock.
In order to consummate the transaction, Charles River needs shareholder approval to issue stock. However, the company could, under its rules, avoid a shareholder vote by reducing the stock portion of the transaction to 19.9% of Charles River's outstanding shares from over 30% currently.
That would mean Charles River would have to increase its debt load by some $275 million, potentially creating greater risk for the company.
In a letter to the board dated June 16, Neuberger Berman said: We would caution the board not to endorse any revision to the proposed WuXi transaction that bypasses the need for a stockholder vote. Such a maneuver could only result in a further impairment of Charles River's value and would amount to nothing more than a blatant affront and disenfranchisement of your stockholders.
In a recent report to clients, Jefferies analyst Dave Windley said anecdotal conversations with investors suggest some 35 percent of shares could be voted against the deal.
In theory, Charles River and WuXi could renegotiate the terms of the deal to appease investors. But a reduction in price of 25 percent to $1.2 billion from $1.6 billion would severely cut into the 38 percent premium to WuXi shareholders, based on the 30-day average closing price of $15.45.
That would leave WuXi with a premium of 13 percent, a haircut deep enough to potentially scupper the deal.
Ronald Aldridge, director of investor relations for WuXi, said the company continues to believe the deal creates the most value for WuXi and Charles River shareholders.
The combination produces the premier early stage contract research organization and it capitalizes on the growing importance of China as a future center of drug discovery and development, he said.
In a June 7 letter to the company's board, JANA Partners said though the transaction might make sense in theory, in reality the promised strategic benefits of the contemplated transaction are also far from certain enough to justify the proposed price and timing.
JANA has also said given robust private equity activity in the contract research organization space, it believes there could be private equity interest in the company.
Shares of Charles River closed up 2.3 percent at $36.37 on the New York Stock Exchange on Thursday. Shares of WuXi closed down 7.5 percent at $16.16 amid concern the deal will fall through.
(Additional reporting by Esha Dey; Editing by Sofina Mirza-Reid, Bernard Orr)