Theatrics and a few embarrassed brokers - ft.com
Theatrics and a few embarrassed brokers - FT.com
Richard Perry's feelings must be hurt. Most of the time, if you are a big-time hedge fundmanager, your prime brokers fall over trying to ingratiate themselves. They light yourcigars, laugh at your bad jokes, drop your name with other people on the Street, and lendstock for you to sell short.
For Mr Perry, though, this is not "most of the time". In the 13d filing in which he disclosedthat his Perry Partners fund had bought, and then sold the equivalent number of sharesshort, about a 10 per cent position in Mylan Laboratories, he and his compliance peoplementioned both Bear Stearns and Goldman Sachs as the firms through which his short hadbeen executed.
The simultaneous purchase and short sale gave Mr Perry the right to use the votesattached to the 10 per cent holding, without having any economic risk attached to theposition. If Mylan's stock price drops, it does not matter to Mr Perry and his partners. MrPerry's votes can now be cast in favour of a merger with King Pharmaceuticals, in which heholds a substantial, unhedged, position. At the time Mylan's management and board struckthe deal for the buyout of King last July, the offer was more than 60 per cent above King'smarket price. The price of King is still more than $4 a share lower than the $16.49 mergerbid, so Mr Perry will profit substantially if the Mylan deal goes through. The abnormallylarge gap between the merger price and the market price would seem to reflect not onlythe other shareholders' doubts about the economics of the merger but their view of therisk of the deal not closing.
In other words, this is a real something for nothing deal for Mr Perry and his partners. Themerger and acquisition world is full of as much theatrics as a Florida election but MrPerry's tactic has provoked real rage among the other Mylan shareholders, and profoundembarrassment on the part of his prime brokers. While neither Bear Stearns nor GoldmanSachs are commenting publicly on their role, the Street is being led to understand they donot like what he is doing, did not know what he was up to when he was doing it, and wouldnot have executed the transactions if they had known the whole picture.
There are, of course, already some dissenting shareholder actions in train against Mylan'smanagement. The lead dissident is Carl Icahn, the veteran merger arbitrageur, who islending his customary theatricality to the fight. Mr Icahn has announced his own bid forMylan, at $20 a share, although the bid is subject to due diligence and financing. He hasalso sued Mylan's chief executive, as well as Mr Perry and his partners, for entering into
Theatrics and a few embarrassed brokers - FT.com
"sham" transactions, "vote buying", and various violations of the securities laws. The caseis before the Federal District Court in the Middle District of Pennsylvania. I doubt his bidfor Mylan will go through but his legal attacks on the Mylan-King merger have a chance ofsucceeding.
Mr Icahn like several other big professional investors, seems to have bought his stake inMylan as a fairly straightforward value play. Pharmaceutical companies are expensive, forthe most part, and Mylan is cheap relative to its portfolio of drugs and its cash flow. It ischeap for a reason, of course, which is that Richard Coury, its chief executive, has not, byany account other than his own, done a good job with the company. From the beginning ofthe year, its share price had fallen from nearly $26 a share down to a little over $19 by themiddle of July. Then, within two days after the merger was announced, it fell another 18per cent.
Nothing in King's prospects justified any premium, let alone one of more than 60 per cent.
The company had a thin portfolio of drugs, one of which, Altace, accounts for 38 per centof its sales. King's rights to Altace are under challenge. The company has several legalthreats to its prospects, including a Federal investigation by the Department of Health andHuman Services. The "synergies" justification for the deal seemed to include payinghundreds of millions of dollars for Mylan being able to use King's salesforce, a purposethat could have been accomplished by a joint venture.
As Mr Icahn says, "Concerning the King transaction, I have seen a lot of absurd deals butthis one is in a class by itself."
Actually, it is so bad that some usually well informed investors believe its badness orabsurdity was the very point. As one investor says: "There is no way that anyone wouldwant to take over Mylan if the King deal goes through."
You can see why Mr Perry's prime brokers have put away their cigar lighters, are no longerlaughing, and are edging towards the door.
While the law and precedents are not crystal clear, I would not bet on the courts allowingMr Perry and the Mylan management to get away with pushing this deal through.
Delaware law, which the Federal court will reference, is not sympathetic to manoeuvressuch as Perry Partners'.
Mr Coury may yet want to dust off his resumé.
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