Genzyme: When Buyout Premiums Become Opaque (GENZ, SNY, JNJ, GSK, BIIB)

All of the freshest reports have the Genzyme Corporation (NASDAQ: GENZ) buyout discussions between Sanofi-Aventis (NYSE: SNY) as being a friendly merger.  The first discussions noted by the WSJ were a $67 to $70 per share price range.  It might seem like a problem that shares closed at $70.36 yesterday and that shares are up around $71.00 this morning.  This is no problem at all.  The problem is explaining the premium, or lack thereof, to newer holders.

Many investors look merely at 52-week highs when determining a fair buyout price.  That analysis or observation becomes very flawed and grossly irrelevant when the 52-week comes as a result of “news of buyout talks sending shares to 52-week highs.  That is what happened to Genzyme.

The share price of Genzyme hit $80 just under two years ago.  Then the market crash brought it lower along with earnings growth.  Then the big hit came from the manufacturing woes.  Suddenly, Genzyme’s best days were behind it.  Shortly before the most recent buyout discussions came, Genzyme hit a 5-year low in its share price under $50.00.

The highest the shares went was $60 on its own accord earlier in 2010 on hope that the manufacturing issues would have only a muted effect.  While it may not be a terminal case of poor operations, shares were around $52 and $53 before word of the buyout surfaced in the last two weeks.

When news surfaces of a buyout, it is where shares had been before the news that matters.  Speculators getting in after the fact are of no concern nor obligation on behalf of the would-be buyer.  Otherwise, it would be very difficult to get any premium deals done.

Genzyme may command a higher price than this $67 to $70 price range.  The current share trading is indicative of that.  A higher price may have to come from a rival bid as there had been reported speculation that both Johnson & Johnson (NYSE: JNJ) and GlaxoSmithKline plc (NYSE: GSK) or even other suitors may have an interest.

Biogen Idec Inc. (NASDAQ: BIIB) had long been considered a buyout candidate.  It even tried for a very brief period to find a buyer.  Nothing surfaced, and the speculation was that the company was only tire-kicking.  Is Genzyme tire-kicking?  Who knows. At least Chairman and CEO Henri Termeer got that share price back up.  Termeer was on the verge of ending a strong and great career on a very sour note.

Just last week at BioHealthInvestor we noted how and why the various options prices were signaling a $70 implied buyout price.  Shares are trading at a premium to that price this morning.  Barely.  Jefferies has an event-driven analysis calling for a likely price in the mid-$70’s.  Citi downgraded the stock yesterday despite a call that it would likely fetch $74 to $77 before it was all said and done.

If Termeer and friends and Genzyme push back too much or decide to fight the buyout by making the company less attractive, this will end up as one of those great “would have been, could have been” moments for Genzyme.

If a problem surfaces from the side of Genzyme or if a problem arises during the due diligence phase, this will become a very ugly situation for anyone who has not hedged their bets here.  Our call is still for a $70-ish initial buyout offer.  If that buyout fails to materialize from any problems, the $60 is likely to be the ‘best case scenario’ based upon how Genzyme traded before the last two weeks.

JON C. OGG