Is it too late to profit from the takeover battle between Mylan Labs and King Pharamaceuticals? - Dylan Jovine

Writing About the Stock Market & Life Since 2003


Is it too late to profit from the takeover battle between Mylan Labs and King Pharamaceuticals?


Mylan Labs (NYSE:MYL), seeking to increase it’s competitive
position within the generic drug industry, makes a $16.49/share
all-stock bid for King Pharmaceuticals (NYSE: KG).

The board of King, believing that the offer makes “strategic
and financial” sense accepts the offer as fair.

Mylan Labs rejoices.

Enter financier Carl Icahn, the scrappy member of the Forbes 400
list and supposed influence for Oliver Stone’s “Gordon Gekko”
character in the movie “Wall Street.”

Believing that Mylan was overpaying for King, he tries to thwart
the deal by purchasing a 9.8 percent stake in Mylan and offering
to buy Mylan for $20 per share.

Mylan Labs cries foul.

Enter financier Richard Perry. The famed money manager, who already
owns 7 million shares of King, steps in and one-up’s Icahn,
purchasing 9.98 percent of Mylan.

It’s clear that Perry supports the merger and wants to vote his
Mylan stake in favor of the deal. Talk about playing two ends
against the middle.

While the clash of the ego-titans continues, I decided to see if
there was any money in it for us.

Here’s what I found:

King Pharma is currently trading at $12.42. That’s $4 dollars
below the agreed upon merger price – a 32 percent discount.

Generally, when two companies agree to merge and there is little
reason to believe that the Justice Department won’t disapprove,
there would be a far smaller discount, say 5 – 10 percent,
depending on if it’s a cash or stock deal.

But this discount is large for two reasons:

1. Icahns purchase has thrown a monkey wrench into the deal,
raising a chance that it won’t happen.

2. Accounting Investigation: King Pharmaceuticals is being
investigated by the SEC and may have to re-state several years
of its “historical returns reserves.”

Not a pleasant thing, but its more of an accounting issue than
a cash flow issue.

The real danger is that Mylan, who was well aware of the
SEC investigation before it offered to buy King, lowers
the acquisition price if the result is bad.

Here’s my bet:

**Icahn won’t prevail in his quest to purchase
Mylan or derail the merger. As a matter of fact, he sounds
much less optimistic now that investors such as Perry are
challenging his moves.

**The SEC investigation into King will not conclude
with a “material” event that will dramatically impact the
financials of the company.

**The deal will prob. take 12 months to close from today.

**There is a 75 percent chance this deal gets done.

**If the deal doesn’t happen, King will fall down to
it’s pre merger price and year low of $10 per share.

By purchasing King today, I think youre likely to make
20 percent on your money.

Not bad for a years work.

Open minds mean larger wallets,

— Dylan Jovine

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