Kosan Biosciences shares soar 230% as Bristol-Myers Squibb tenders at $5.50 per share

By Paul A. Harris

St. Louis, May 29 - Shares of Kosan Biosciences Inc. shot up nearly 230% on Thursday as Bristol-Myers Squibb Co. (NYSE: BMY) announced a $5.50 per share all-cash tender for Kosan shares in a merger deal valued at $190 million.

Bristol-Myers timed the acquisition well, said Jerry Tang, Ph.D., senior biotechnology analyst for Roth Capital Partners, but he added that the $5.50 per share offer is not likely to create much excitement among Kosan shareholders.

"This is a good bargain for BMY because the offering price is actually one dollar below the 52-week high for Kosan," Tang commented, adding that Kosan shares traded at $6.50 last summer, then dropped when the company experienced a clinical setback.

"It's good timing for BMY because market conditions have been stressful for the small cap companies," Tang added.

"The whole sector was down significantly in the first quarter, and then started rebounding a bit in April."

Likely to take it

The biotech equities analyst went on to say that although Kosan shareholders might have been expecting a higher bid, a conversation with a major shareholder led him to believe that market conditions with respect to the biotech sector have created some fatigue, eroding resistance.

"Small cap stocks generally have a liquidity problem," he said.

"If you have a million shares in hand it's hard to get rid of them all at once.

"This presents a good opportunity."

Stage was set

Tang reckoned that Kosan had been setting the stage for either a partnership or a sale since around the beginning of the year.

In late February Robert Johnson Jr. vacated the chief executive officer post following a clinical setback.

The company promoted its chief business officer, Helen Kim, to fill the post, and it was generally understood that Kim would attempt to either form a partnership or get the company sold.

"They cut the workforce by 37% and shut down some clinical programs in order to preserve cash," Tang said

The analyst expects the $5.50 per share deal, which has the approval of both boards, to get done.

"There could be a holdout among Kosan's shareholders, but it's unlikely," he added.

"Nevertheless people are unexcited by the offer."

Kosan shares (Nasdaq: KOSN) shot up by 229.09% on Thursday, closing at $5.43, up $3.78 per share.

Bristol-Myers shares, meanwhile, ended the session 1.77% higher at $22.48, up $0.39.

The Amex Biotechnology Index gained 2.87% on Thursday, up $21.26, to close at $761.90.

Speculation brewing

A special situations equities analyst pointed out that August Busch IV, CEO of Anheuser-Busch Cos. Inc., told the Wall Street Journal that a possible deal with Belgian brewer InBev NV should be judged on shareholder value, not family legacy. Busch also told the Journal that support from Warren Buffett, holder of a 5% stake in Anheuser-Busch, would increase the deal's likelihood.

Erin Ashley Smith, an analyst in the consumer staples sector for Argus Research, told Prospect News on Thursday that should an offer surface from InBev at levels consistent with those first paraded by a Financial Times blog - $65 per share, or approximately $46 billion - there is a much stronger likelihood that the deal would go through.

In a report published last Friday Argus lowered it near-term rating on Anheuser-Busch to hold from buy, noting that the shares had reached Argus's fair value estimate of $56.

"For those investors who are highly risk averse, we would suggest taking the gain at this point as there has been no formal acquisition announcement," Smith wrote in the report.

"We think that much of the benefit from a potential acquisition is already priced into the shares and that the risk of buying on rumor outweighs the potential benefit of an offer at $65 per share.

"We are, however, keeping our long-term rating at BUY. Assuming that [Anheuser-Busch] is not acquired, we expect the company to continue to grow through acquisitions, product improvement efforts, and international expansion."

On Thursday shares of Anheuser-Busch (NYSE: BUD) plowed ahead 2.5%, or $1.38 per share, to close at $56.51.

Meanwhile InBev shares gained 1.31%, or €0.63, ending the session in Europe at €48.89.

Penn National clears another hurdle

Elsewhere on Thursday a special situations equities analyst noted that Penn National Gaming Inc. received approval from the Pennsylvania Gaming Control Board for the leveraged buyout of the company by affiliates of Fortress Investment Group LLC and Centerbridge Partners, LP.

Earlier in May the West Virginia Racing Commission approved the deal.

Approvals have also been obtained from the Ohio State Racing Commission, the New Jersey Racing Commission, the West Virginia Lottery Commission, the New Mexico Gaming Control Board, the New Mexico Racing Commission, the Pennsylvania State Horse Racing Commission and the Mississippi Gaming Commission.

However, the analyst added, approvals from a handful of other states are pending.

Under the merger agreement, if the deal is completed by June 15, Penn National shareholders will be entitled to receive $67.00 cash per share. If the merger is not completed by June 15, the per-share merger consideration will be increased by $0.0149 per day.

Penn National Gaming (Nasdaq: PENN) shares rolled up 3.02% of gains on Thursday to close at $46.41, $1.36 higher on the session.

Thursday's situations unfolded against a backdrop of modest rallying in all three major U.S. stock indexes.

The Nasdaq was the outperformer, gaining 0.87%, or 21.62 points, to close at 2,508.32.

The S&P 500 ended 0.53% higher on the day to close at 1,398.26, up 7.42 points.

The Dow Jones Industrial Average rose 0.41% in Thursday trading, gaining 52.19 points to close at 12,646.22.

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