Cephalon rejects Valeant's $5.7 billion bid

NEW YORK/TORONTO Tue Apr 5, 2011 8:50pm EDT

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NEW YORK/TORONTO (Reuters) - Cephalon Inc CEPH.O on Tuesday rejected an unsolicited, $5.7 billion acquisition bid by Canada's Valeant Pharmaceuticals (VRX.TO)(VRX.N), and Valeant sought to replace the U.S. biopharmaceutical company's board of directors.

Cephalon said Valeant's $73-a-share bid, which Valeant expects to finance entirely with debt, undervalued the company, as well as "its key assets and its prospects."

"From the standpoint of the Cephalon shareholder, a transaction with Valeant at this time and at the price you proposed would mean forgoing the greater value obtainable from Cephalon's strategic plan, including the value inherent in our diversified and robust portfolio of marketed and pipeline products," Cephalon said in a letter to Valeant.

The letter was disclosed in a press release.

Valeant has said its offer represented a 24 percent premium over Cephalon's closing share price of $58.75 before news of the deal became public, and about a 29 percent premium over the U.S. drugmaker's 30-day trading average.

Cephalon's stock has traded above the offer price, closing on Tuesday at $77.35.

Noting disappointment over the Cephalon rejection of its bid, Valeant said it has received positive feedback from many of the largest Cephalon stockholders.

Some of Cephalon's biggest shareholders happen to be the largest shareholders in Valeant as well. They include T. Rowe Price (TROW.O) and Fidelity.

Some analysts said Valeant's bid did not take into account Cephalon's pipeline.

"Valeant offered to pay $73 per share or $5.7 billion in cash with essentially no value for Cephalon's pipeline. The deal appears to be opportunistic in taking advantage of Cephalon's weak stock price," Buckingham Research Group analyst David Buck said in a research report.

Valeant, meanwhile, fulfilled its promise to move quickly to try to replace Cephalon's board.

In a filing with the U.S. Securities and Exchange Commission, Valeant said it was seeking to replace the board because "we believe that the company board is not acting, and will not act, in your best interests."

Valeant said Cephalon has "declined to engage in meaningful discussions with us in a timely manner. We believe that the company's stockholders -- the owners of the company -- are entitled to make a decision on whether or not the company should be sold," the SEC filing said.

Valeant has been moving swiftly and is looking for a quick outcome, whether or not it gets Cephalon. It has said it could raise the bid if it is allowed to look at Cephalon's books and sees additional value.

In Cephalon, Valeant would gain a company with strong cash flow, a growing cancer drug in Treanda and several other products, a branded generics business that would fit in with its own, and a promising pipeline of drugs in development.

Valeant Chief Executive Michael Pearson has said he is prepared to walk away from the bid within a month if the Cephalon shareholders can't be persuaded.

Valeant's nominees for Cephalon's board are Santo Costa, Richard Koppes, Lawrence Kugelman, Anders Lonner, John McArthur, Thomas Plaskett and Blair Sheppard.

Cephalon set a record date of April 8 by when shareholders must own Cephalon stock to be eligible to vote on Valeant's board nominees.

"Unless a knight in shining armor comes and puts in a bid that's much higher than Valeant is willing to go, I can see Valeant trying to force this deal through by trying to change the board and change the vote," Stifel Nicolaus analyst Annabel Samimy.

"I don't see a situation where Valeant is going to significantly bid against itself. There's no other bidder here, for now," Samimy said. "Cephalon is in a rough spot if they're going to be able to change the board."

Valeant, formed when Canada's Biovail bought U.S.-based Valeant in September for $3.3 billion and took its name, may bring some baggage to the table.

Valeant predecessor Biovail has a checkered history that the Cephalon board may take into consideration. It recently reached a settlement with U.S. securities regulators over allegations that Biovail had committed accounting fraud.

The Securities and Exchange Commission had accused Biovail and four current and former officers of overstating earnings and hiding losses to meet earnings forecasts.

In 2007, Biovail paid $138 million to settle a shareholder lawsuit accusing it of making false statements to inflate its stock price.

(Reporting by S. John Tilak and Jessica Hall; editing by Rob Wilson, Bernard Orr, Gary Hill)

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