Roche set to walk away from $6.8 billion Illumina bid

ZURICH/NEW YORK Wed Apr 18, 2012 2:54pm EDT

The logo of Swiss pharmaceutical company Roche is seen at the company's headquarters in Basel April 5, 2012. REUTERS/Arnd Wiegmann

The logo of Swiss pharmaceutical company Roche is seen at the company's headquarters in Basel April 5, 2012.

Credit: Reuters/Arnd Wiegmann

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ZURICH/NEW YORK (Reuters) - Swiss drugmaker Roche (ROG.VX) said on Wednesday it would not extend a $6.8 billion hostile offer for genetic specialist Illumina (ILMN.O) as the U.S. group's shareholders blocked its move to appoint new directors.

Roche, which is now set to walk away from its takeover target, said an offer above $51.00 per share would not be in the interests of its own shareholders.

The tender offer for Illumina expires on Friday and Roche said it would not extend the bid as the U.S. firm's management had refused to engage in constructive dialogue.

The decision is a victory for Illumina in its battle to stay independent, although some investors think Roche may wait in the wings for a fresh opportunity to pounce if the U.S. company's shares underperform.

The gene sequencing specialist, which branded itself "the Apple (AAPL.O) of the genomics business", rejected Roche's sweetened takeover offer and had repeatedly urged shareholders to vote against appointing Roche's nominees to its board.

"It won't hurt Roche to send a signal that they can walk away from these deals," said Navid Malik, an analyst at Cenkos Securities.

Roche, the world's largest maker of cancer drugs, has been developing targeted therapies and Illumina's technology would help it to progress further in this field as gene sequencing can better identify which patients benefit from a given drug.

But there are also other approaches Roche can take, given its existing strong position in diagnostics.

"Roche will continue to consider options and opportunities to develop further its portfolio of businesses in order to expand its diagnostics leadership position," Chief Executive Severin Schwan said in a brief statement.

Roche's decision not to extend its bid came as Illumina shareholders were meeting to vote on a Roche proposal for a slate of nominees for director seats, in a bid to win majority control of the board.

Illumina shareholders backed all four of Illumina's nominees to the board and rejected Roche's proposal to increase the size of the board to 11 directors.

"We are pleased that Roche has decided not to extend its inadequate offer to acquire Illumina and that we can now return our full focus to growing our business, making the most of the expanding opportunities in our space, and delivering superior results for our customers and stockholders," said Illumina CEO Jay Flatley.

Roche CEO Schwan had already warned Roche would have to consider "all its options" if Illumina shareholders voted against its proposals at that meeting.

"What played a role was not only that Illumina didn't want the deal, but also that Roche shareholders had qualms about a further increase," said Birgit Kulhoff, portfolio manager at private bank Rahn & Bodmer.

TRADING STRATEGY

One hedge fund shareholder at the Illumina meeting in New York said the top three or four shareholders were behind Illumina management and the board, so the outcome of the vote was no surprise.

Anticipating this outcome, many hedge funds had shorted Illumina stock and actually made money, he added.

Even so, some hedge-fund shareholders think Roche may be back, given the attraction of Illumina technology to Roche's central goal of developing "personalized" medicines that are tailored to patients' genetic profiles.

"My conviction is that when a player like Roche starts putting its grip on a company, it generally ends up grabbing it. This is not the end of the story," said one.

Roche has built up a reputation as a tough and disciplined consolidator after protracted recent takeover battles for Ventana and Genentech. But in both cases, the pattern was to exhaust shareholders and strike a deal with a last-minute sweetener.

Shares in Illumina were trading down 4 percent at $42.20 by 1530 GMT, below Roche's initial offer of $44.50 per share, made when it launched the bid in January. Roche shares were up 1 percent at 162.90 Swiss francs.

Hedge fund investors and bankers had said they would expect Illumina's shares to plunge to $38-42 standalone value if Roche walked away.

(Additional reporting by Ben Hirschler and Sophie Sassard in London; Editing by Helen Massy-Beresford)

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