Why Can't Sanofi Get That Zentiva Deal Done?
The M&A chess match going on between Sanofi-Aventis and Zentiva, a Czech Republic-based generic drug maker, is fascinating because it seems that the tiny Czech company is the one in a position of strength. Sanofi's bid was rejected by Zentiva on Wednesday.
At first glance, it appears that Sanofi has everything going in its favor: The global French giant has nearly $30 billion in annual revenue and holds about $1 billion in cash on its annual balance sheet. It markets a diverse portfolio of offerings in virtually every developed contry in the West.
Zentiva, by contrast, has net sales of only $900 million (16.67 billion Czech crowns) and just $127 million in cash on its balance sheet. It's based primarily in a few countries in central Europe and does only one thing: make generics. (You can correct me on whether I've converted Czech crowns to U.S. dollars properly, but even if I haven't let's just agree that Sanofi is big and Zentiva is small.) Sanofi ought to have enough financial muscle to subsume Zentiva.
Also going in Sanofi's favor is the fact that Zentiva has publicly said that it is happy to be taken over. Zentiva's Petr Sulc told Reuters:
A partnership with any (pharmaceutical) company and in any form is exactly what we're looking for ... In three years (Zentiva) will definitely be part of something bigger.On top of that, the regulatory environment hasn't exactly been harsh toward branded pharma takeovers of generic producers. Attempts of the FTC to oppose such deals have been rebuffed by the U.S. courts. Lastly, Sanofi appears to have no competing bidders for Zentiva. With all those winds blowing in Sanofi's favor, why has this deal not been done?
Zentiva offered this corporate-finance-speak explanation of why it rejected the offer. The usual villains are cited: "comparable transaction multiples," "fundamental value," and so on.
But let's look at it in more basic terms. First, Sanofi made seems to have made the tactical mistake of making an offer that is actually lower than Zentiva's current stock price, offering shareholders a none-too-tempting discount on their stock. Zentiva closed Friday at 1,069 crowns. Sanofi's offer of 1,050 crowns per share was below the company's price of 1,066 crowns at the tie the offer was made.
But more important is that Zentiva probably recognizes that Sanofi's current business model has some fundamental weaknesses in it, while its own seems fundamentally strong. This MarketWatch story from late July gives a pretty good summary of Sanofi's ills -- a weak pipeline, failing drug trials, and an inability to get potential blockbusters like its weight loss drug Acomplia approved in the U.S.
Zentiva, by contrast, saw its net sales jump 32.3 percent in the first half of this year, due to its own successful acquisition plans.
By those lights, it seems that the Czech minnows who are "happy" to be taken over are actually the ones holding Sanofi over a barrell.