Merck plows over Schering-Plough; Dow, Rohm & Haas settle; Genentech wants more from Roche

By Cristal Cody

Tupelo, Miss., March 9 - The market awoke Monday to a $41.1 billion stock-and-cash acquisition of Schering-Plough Corp. by Merck & Co., Inc., but the price could have been higher based on an initial agreement first struck by the two New Jersey-based drug companies.

After two halts to the start of a trial and a halt in trading of the stock of Dow Chemical Co. and Rohm & Haas Co., a tentative agreement was reached for Dow to close on the $15 billion acquisition.

While Roche Holding AG increased its bid for Genentech Inc. on Friday, the market expects another price bump, an analyst said Monday.

CF Industries Holdings Inc. on Monday rejected the unsolicited $3.6 billion takeover bid from Agrium Inc. and instead sweetened its hostile stock offer for Terra Industries Inc.

Agrium, though, said it plans to launch an exchange offer for CF Industries' outstanding stock.

Charlotte Russe Holding, Inc. keeps stalling on its exploration of strategic alternatives including a sale of the retailer, which leaves doubt on the ability to get a deal done, an analyst said Monday.

Meanwhile, stocks fell on Wall Street.

The Dow Jones Industrial Average lost 79.89 points, or 1.21%, to close at 6,547.05.

The Standard & Poor's 500 index fell 6.85 points, or 1.00%, to 676.53, and the Nasdaq Composite index dropped 25.21 points, or 1.95%, to end trading at 1,268.64.

Merck first agreed to pay more

Shares of Schering-Plough gained $2.50, or 14.18%, to close Monday at $20.13, while Merck's shares fell $1.75, or 7.70%, to close at $20.99.

Under the terms of the reverse merger, Schering-Plough shareholders will get $10.50 in cash and 0.5767 of a Merck share for each Schering-Plough share - a 34% premium to Schering-Plough's closing stock price on Friday.

Based on Merck's closing stock price on Friday, the deal is valued at $23.61 a share.

Merck chairman and chief executive officer Richard Clark said on the analysts conference call Monday that buying a "company of the caliber of Schering-Plough at a 44% premium during that period is extremely reasonable."

However, Fred Hassan, chairman and CEO of Schering-Plough, let it slip in response to a question on the call that the companies had first talked of a higher number.

"In fact, Dick and I had agreed on another number which was $26.25 based on a 30-day average, but as you know even the Dow Jones index is down right now," Hassan said. "There is a secular decline in capital markets and therefore one should not get locked in on any single date in terms of a price."

Robert Hazlett, an analyst with BMO Capital Markets, said in an interview Monday with Prospect News that the deal is just "OK."

"It's good, but it's not great," he said. "In a different environment, the deal could have been much higher. Given this environment, Schering could have operated extraordinarily well for several years and still not been rewarded in terms of the stock price."

The merger is expected to close in the fourth quarter.

The deal requires approval from shareholders, U.S. regulatory agencies, the European Commission and other foreign jurisdictions.

The companies declined to release the amount of the break-up fee until filings are made with the Securities and Exchange Commission, which are expected by Thursday.

The companies said that the deal does not trigger change of control provisions for Schering-Plough because the deal is structured as a reverse merger. Schering-Plough will be the surviving corporation but will be renamed Merck.

The new combined company will operate out of Merck's headquarters in Whitehouse Station, N.J. Schering-Plough is based in Kenilworth, N.J.

Because of change-of-control questions and other potential hurdles, the deal is far from a "slam dunk," Hazlett said. "At the end of the day, there's risk across the industry, risk certainly in the business models of each individual company and getting the price today speaks to some of the concerns."

Dow, Rohm & Haas settle

Rohm & Haas' two major shareholders, the Haas Family Trusts and Paulson & Co., will purchase $3 billion of preferred equity from Dow to reduce the amount of debt financing required to fund the deal.

Dow has restructured the deal to pay $63.00 a share in cash and $15.00 a share of preferred equity securities.

Dow said it also plans to aggressively start selling off business units, including the Morton Salt division owned by Rohm & Haas.

The deal is to be completed no later than April 1.

Rohm & Haas shares rose $10.20, or 15.99%, to close at $74.00 on Monday, while Dow's stock dropped 78 cents, or 10.97%, to close at $6.33.

The two companies spent the weekend in settlement talks before the scheduled start of a Delaware Chancery Court trial over the lawsuit Rohm & Haas filed against Dow to force the deal's completion.

Dow had offered $78.00-a-share for Rohm & Haas in July, but backed out of closing the deal in January. Dow had planned to use proceeds from a failed Kuwait joint venture to help fund the takeover.

"Dow has taken the time and steps necessary to close this transaction on substantially improved financial terms to the company, despite the continuing financial and economic uncertainty facing our world," Dow chairman and CEO Andrew Liveris said in a statement. "The strategic benefits of the acquisition of Rohm & Haas have never been in question; just the path to completing the deal."

Roche's DNA

An analyst said Monday that Genentech's special committee would be more convinced to agree to Roche's takeover on an offer of $96.00 a share.

Switzerland-based Roche on Friday increased the bid to $93.00 a share and extended the tender to March 20, "potentially indicating that it is not willing to wait beyond April," the analyst said.

In fact, late reports suggest the companies are in talks for Roche to pay $95.00 a share for the remaining 44% of stock it does own of the South San Francisco, Calif.-based drug company.

Genentech shares rose $1.77, or 1.95%, to close at $92.63 on Monday.

An analyst told Prospect News that the deal is more like a chess game as shareholders mull whether to take the bid or try to hold out until April when key colon cancer drug data is due.

"There appears to be no real cost to the DNA [Genentech] special committee in holding out for more, unless it believes that there is a chance of negative news on the Avastin data," the analyst said. "In our view, Roche's track record as a bidder suggests that it is willing to increase the offer price and strike an agreed deal. We understand that Roche has not walked from any of the M&A deals it has been involved in since 2001."

Roche has closed on 14 acquisitions since 2001.

Genentech urged shareholders to take no action on Friday's offer.

CF's tricks in store

CF Industries said it will pay $27.50 a share in stock for Terra based on an exchange ratio of between 0.4129 and 0.4539 of a share.

That compares with the Deerfield, Ill.-based fertilizer maker's first offer of 0.4235 of a share of CF Industries for each Terra share for a value of about $20.00 a share.

The new bid does not require shareholder approval, according to CF Industries.

Representatives of Sioux City, Iowa-based Terra, which makes and sells nitrogen and methanol products for the agricultural and industrial markets, did not return calls for comment.

Agrium president and CEO Mike Wilson said in a statement that the company is disappointed by CF Industries' response but doesn't plan to give up.

The Calgary, Alta.-based fertilizer producer has offered CF Industries stockholders $72.00 a share, which includes $31.70 in cash and one share of Agrium for each share of CF Industries.

"It appears that CF's board and management concluded that CF's stockholders would choose Agrium's offer over CF's proposed Terra acquisition and, as a result, decided to use an unusual non-voting security to deny their own stockholders a voice in this critical decision," Wilson said. "While our preference is to work together with CF to negotiate a definitive merger agreement, we remain fully committed to acquiring CF and are considering all available options."

A source told Prospect News on Monday that Agrium's response shows "there is a chance [to complete the deal] but I'm not sure how badly they want this."

It's anyone's game at the moment, the analyst said.

"These things have a life of their own. It's not over till it's over," he said.

Shares of Terra fell 94 cents, or 3.60%, to close at $25.17, while CF Industries' stock gained 97 cents, or 1.60%, to close at $61.56.

Agrium shares rose $1.15, or 3.66%, in trading to close at $32.58 on Monday.

Charlotte Russe keeps looking

Charlotte Russe said it continues to explore strategic alternatives, but the market isn't so sure of the outcome.

On Friday, KarpReilly Capital Partners, LP said in a 13D filing with the SEC that it had increased its ownership of Charlotte Russe to 7.68% from 5.58%. The firm's co-founder, Allan Karp, also nominated himself and two others to the board.

Shareholders will vote at Charlotte Russe's stockholders meeting on April 28.

The San Diego-based retailer urged shareholders in a statement to reject the nominees because the representation could disrupt the board's process of exploring alternatives.

However, "there is nothing preventing KarpReilly from participating as a bidder in a sale process," the company said.

KarpReilly and H.I.G. Capital LLC had offered $9.00 to $9.50 a share to acquire Charlotte Russe in November, but the board rejected the bid and KarpReilly withdrew the offer.

Amy Noblin, an analyst with Pali Capital Inc., said Monday in an investor's note that Charlotte Russe's stock has fallen by 31% since then.

"We acknowledge some product improvement in stores, but question the ability of this new management team to execute a turnaround of this magnitude in the current environment," she said.

"We also have some doubt regarding the ability to get a deal done at an acceptable price in this environment. In the end, KarpReilly has significant history with the company and now a significant financial interest."

Shares of Charlotte Russe closed down by 6 cents, or 1.07%, at $5.54 on Monday.

Mentioned in this article:

Agrium Inc. NYSE: AGU

CF Industries Holdings Inc. NYSE: CF

Charlotte Russe Holding, Inc. Nasdaq: CHIC

Dow Chemical Co. NYSE: DOW

Genentech Inc. NYSE: DNA

Merck & Co., Inc. NYSE: MRK

Roche Holding AG Swiss: RO

Rohm & Haas Co. NYSE: ROH

Schering-Plough Corp. NYSE: SGP

Terra Industries Inc. NYSE: TRA

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