Dealtalk: Roche, Illumina hunker down for takeover battle

LOS ANGELES/PHILADELPHIA Wed Jan 25, 2012 6:17pm EST

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LOS ANGELES/PHILADELPHIA (Reuters) - Roche Holding AG's (ROG.VX) hostile bid for Illumina Inc (ILMN.O), the market leader in gene sequencing technology, is likely to be a protracted battle lasting well into 2012 based on Roche's past deal playbook and possible regulatory hurdles.

The Swiss drugmaker plans to formally launch a tender offer for Illumina by early next week at $44.50 per share, or $5.7 billion, according to a source familiar with the matter. U.S.-based Illumina would have 10 days to respond.

Roche said it has no intention of raising its offer and will nominate its own slate of directors to Illumina's board ahead of the company's annual meeting, expected around May this year. For their part, Illumina investors have signaled their confidence in a higher price, trading shares at more than $55 on Wednesday.

"This is going to take a while. There's room for a protracted wait-them-out strategy as Roche puts pressure on Illumina's board," said one arbitrageur, who declined to be named because he was not authorized to speak with the media.

Even if the two companies reach a deal, their combined dominance of the market for gene sequencing could well draw scrutiny from antitrust regulators and further delay investors' payday.

"There's a high likelihood of getting a second request (for information from regulators), so the time to close on a deal could be several quarters away," the arbitrageur said.

Many deal watchers point to Roche's history with acquisitions like tissue diagnostics company Ventana and the buyout of biotech company Genentech.

"History suggests that they will probably go higher here," said Cowen & Co analyst Doug Schenkel.

In January 2008, Ventana agreed to Roche's buyout offer of $89.50, six months after the original bid of $75.

The Ventana takeout price was close to 8 times enterprise value over sales, a valuation "which is well north of this offer," said Wedbush analyst Zarak Khurshid. He said $44.50 per share is equivalent to about 5 times Illumina's enterprise value over his 2012 sales estimate for the company.

Robert W. Baird analyst Quintin Lai -- who has upgraded his price target on Illumina shares to $60 -- noted that Illumina has given a very bullish outlook for 2012.

"They have not been looking to sell the company," Lai said. "Now that Roche has ... forced it into play, maybe other buyers will come up."

FROM LAB TO CLINIC

Illumina relies on research laboratories, which in turn depend to a large degree on government funding, for around 80 percent of its sales. But the future for gene sequencing technology -- as evidenced by the Roche bid -- is in clinical diagnostics.

Genetic sequencing is currently used in limited capacity to study patients' cancer tumors or in prenatal diagnostics. Wider use by doctors will expand as the cost of sequencing drops and drugmakers increasingly rely on medicines that target specific genes.

Analysts expect other companies to take a close look at Illumina from Agilent Technologies (A.N), General Electric (GE.N) and Thermo Fisher Scientific (TMO.N) to Siemens (SIEGn.DE), Danaher (DHR.N) and Johnson & Johnson (JNJ.N).

But few would be as motivated as Roche, given its lead in developing personalized medicines and diagnostic tests. Roche's own sequencing technology has been outshadowed in recent years by advances at Illumina and rival Life Technologies LIFE.O.

"Another bidder would be a low probability event," said Khurshid at Wedbush, citing the price threshold already set by Roche. "This is a way to step back into the fastest growing area of life science tools."

Illumina shareholders won't be quick to jump at Roche's offer, as the company was valued at nearly $80 per share just last July. The company also has some protection against a proxy battle with its staggered board of directors, which means Roche faces a high hurdle at replacing any more than four directors this year.

Illumina currently lacks a poison pill or shareholder rights plan, which is a common takeover defense, according to research firm FactSet SharkRepellant. But it could choose to institute one in the coming weeks.

Illumina officials declined comment on its defense strategy.

(Editing by Michele Gershberg, Bernard Orr)

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