Reuters: Deals: Roche could add to sweetener to land Illumina

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Roche could add to sweetener to land Illumina Mar 29th 2012, 16:33 By Martin de Sa'Pinto and Sophie Sassard ZURICH/LONDON | Thu Mar 29, 2012 12:33pm EDT ZURICH/LONDON (Reuters) - Roche Holding (ROG.VX) raised its bid for U.S. gene sequencing company Illumina (ILMN.O) to $6.7 billion in an effort to force its reluctant board to negotiate a sale and left the door open for a further increase to seal the deal. A source familiar with the situation told Reuters the company could increase its bid further if Roche found more value in the business during its due diligence. "Roche wants a quick completion and price negotiation would be part of it," said a second person, who is familiar with Roche's thinking. The Swiss drugmaker said that after talks with Illumina investors, it was willing to pay $51.00 per share, up 15 percent from an initial $44.50, in an effort to garner support for a deal ahead of Illumina's annual general meeting next month. Most Illumina top 10 shareholders see the new offer positively and are encouraging the board to engage with Roche, said the first source. But Roche's way might not yet be totally clear as Illumina's second-largest shareholder Baillie Gifford, which owns 11 percent of the company, is likely to reject the latest bid and hold out for an offer above $60, several shareholders and the first source said. This is because the Edinburgh-based institutional investor bought its shares above $60 and is now seeking to recoup its initial investment, the same sources said. But Roche might not seek to please everyone. "Some people make bad investment. Roche doesn't need 100 percent of the votes (to get a deal done)," said the first source. That could put Baillie at loggerheads with other investors including hedge funds who bought Illumina's shares at around $50-55 and want a deal to happen, five of these short-term investors said. These merger-arbitrage hedge funds -- who make money by betting on the outcome of M&A transactions -- would be happy with a deal at $55-60 a share. "With the new offer, Roche secured hedge funds support ahead of the AGM. It's a smart move, and more hedge funds would now come in," said Lionel Melka, fund manager at Bernheim, Dreyfus & Co. "I do not expect the Illumina management to see the offer as sufficient, looking at historical prices they would likely expect an offer closer to $70," said Birgit Kulhoff, investment research vice president at private bank Rahn & Bodmer. But few see Roche willing to pay up to $70 a share. "I do not expect Roche to arrive at that level. They would rather walk away," she said, adding her bank, a former Illumina investor, had sold all its shares into the market at around $53 per share on the day of Roche's original offer. Illumina shares traded at $51.98, 4.3 percent higher than Wednesday's close by 1432 GMT, reflecting investor expectations that the company could attract a higher bid. Roche shares fell 1.5 percent, underperforming a 0.9 percent drop in the European healthcare index. .SXDP. PUSHING FOR TALKS Roche, the world's largest maker of cancer drugs, has been forging ahead in developing targeted therapies and Illumina's gene sequencing technology could help it better identify which patients benefit from a given drug. The Swiss company's original offer - made in January - was dismissed as too low by Illumina which has itself adopted a so-called poison pill, a defense strategy commonly used by companies to fend off hostile takeovers. Roche said the new valuation was more than 15 percent higher than the original offer, valued at $5.7 billion, because it took into account a larger number of outstanding options that would be triggered at the higher price. Roche Chairman Franz Humer said in a letter to Illumina Chief Executive Jay Flatley the company had decided to increase its offer after "productive discussions" with shareholders and after observing the market reaction to its original bid. "If you continue to decline to negotiate with us, we will have no choice but to continue our effort to effect a transaction unilaterally," he said. "However, I strongly hope that you will either agree to commence discussions with us now or remove all obstacles so that your shareholders can make their own determinations about the adequacy of our increased offer." Illumina said shareholders should not take any action, adding it would "thoroughly review" Roche's revised offer and make a recommendation in due course. Roche's offer expires on April 20, two days after Illumina's annual general meeting at which Roche is aiming to gain control of the Illumina board. Roche has a history of success with hostile takeouts, as highlighted by the earlier buys of U.S. diagnostic test-maker Ventana and U.S. biotech group Genentech. "Now the pressure on the Illumina board and management is increasing and that's a big step towards speeding up this deal," Kepler Capital Markets analyst Martin Voegtli said, adding the transaction could be completed in the next two months. Capital Research Global Investors, Baillie Gifford & Co, Sands Capital Management, Morgan Stanley Investment Management, Jennison Associates, AllianceBernstein and Edgewood Management are the seven biggest shareholders of Illumina with a combined 55 percent of the company. Greenhill & Co., LLC and Citigroup Global Markets, Inc. are acting as financial advisors to Roche, while Goldman, Sachs & Co. and BofA Merrill Lynch are advising Illumina. (Additional reporting by Lewis Krauskopf; Editing by David Cowell) Link this Share this Digg this Email Reprints

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