Sanofi must tread carefully in Genzyme endgame

LONDON (Reuters) - Rumbles of shareholder dissent show French drugmaker Sanofi-Aventis SA SASY.PA is walking a tightrope as it enters the endgame in its drawn-out bid for U.S. biotech Genzyme GENZ.O.

A sign points the way to the headquarters of Genzyme in Cambridge, Massachusetts August 3, 2010. REUTERS/Brian Snyder

Sanofi was expected to extend its $18.5 billion tender offer one last time as a deadline expires on Friday, a likely formality now the two companies are talking about a higher price that could win Genzyme over.

But the concessions are kindling unease among shareholders, who fear that Sanofi might end up overpaying for Genzyme’s business, which makes drugs for rare illnesses.

“It is illogical when you are a company with very strong cash flow and potential that you dump all that philosophy and you go off and you buy a dream,” said John Arnold, chief investment officer at AGF International Advisors.

“You have to have faith that over 3-5 years, somehow like magic, Sanofi can get the return on capital from a standing a start ... we just cannot see that,” said Arnold, whose group is a top 35 shareholder in Sanofi.

Genzyme currently trades close to $72 per share, on the assumption that Sanofi will have to raise its bid that now stands at $69. Some investors expect a deal in the high $70s or possibly even $80-per-share level.

Sanofi has said that talks were progressing, with both sides haggling on the bid’s value and a potential extra pay-out -- or contingent value right (CVR) -- tied to Genzyme’s experimental multiple sclerosis drug Campath.

Standard Life Equities Investment Director Iain Galloway said “a value neutral deal” was around $75/share, still some way ahead of Genzyme’s $71 50-day moving average share price.

He worries that the CVR would give away significant potential upside, to the detriment of Sanofi owners, he told Reuters in an interview this week.

Weary of the slow progress in discussions, one Sanofi shareholder said some investors would sooner see it return its massive warchest via a share buyback than pay over the odds for a company whose key assets are so tough to value.

“The L’Oreals, the Totals might well be asking themselves if Sanofi is generating so much cash, why don’t they do a big buyback and support the shareprice that way?,” the manager said, referring to Sanofi’s two largest shareholders.

Still, with even some Genzyme shareholders worrying that Sanofi might walk away if the Genzyme board is too bullish on price, a deal seems a near certainty.

“Genzyme has no other option, no white knight and disappointing results so I am not sure that their negotiation position is so strong,” said Lionel Melka, co-manager of the Bernheim, Dreyfus & Co Diva Synergy Fund.

“We think that an offer at $74-75 cash plus a CVR of $5-6 could be accepted by Genzyme’s board.”

Editing by David Cowell