RPT-DEALTALK-Genzyme has little leverage to play hardball

(For more Reuters DEALTALKS, click [DEALTALK/])

* Manufacturing problems will take years to resolve

* Two sides continue to talk, not at CEO level-sources

* Genzyme shares shed gains as silence persists on talks

By Jessica Hall

PHILADELPHIA, Aug 13 (BestGrowthStock) – Biotechnology company
Genzyme Corp (GENZ.O: ) may be holding out for more money from
suitor Sanofi-Aventis (SASY.PA: ), but will find it difficult to
persuade investors it is better off on its own.

France’s Sanofi has offered $69 a share, or $18.4 billion,
for Genzyme, sources familiar with the process told Reuters
nearly two weeks ago.

Since then few details about the process have emerged and
Genzyme shares have started to bleed some of the gains seen
since news of Sanofi’s interest emerged in late July. They
closed at $66.30 on Friday.

Genzyme and Sanofi remain in contact and continue to talk,
but no CEO-to-CEO meetings have taken place yet, one source
familiar with the situation said.

Genzyme, of course, wants more — as much as $80-plus a
share, sources said. Analysts see the deal getting done between
$74 to $77 per share. [ID:nLDE6710WY]

If Genzyme rejects Sanofi, the maker of drugs for rare and
chronic diseases would have to justify to its shareholders that
it can do a better job of resolving its manufacturing problems
and providing stronger returns on its own.

“If they go to sale, they can make shareholders whole right
now, or if they decide to go it alone, it’s going to take a long
time to get the stock higher. If I had been buying the stock in
the $50s and had a deal for $69, I’d be taking it because it’s a
nice reward,” Jon Stephenson, an analyst with Summer Street
Research said on Friday.

Stephenson believes Genzyme shares would fall back to the
low $50s if deal talks dissolve and says it would take at least
12 months for the company to work its way back from there.

“Do you reject a $70-something deal on the hope that your
stock will be in the $80’s in a few years? The time return on
money in that equation doesn’t hold much water if you’re just a
short-term investor,” said one arbitrageur who declined to be
named because he was not authorized to speak with the media.

Genzyme, which has said it aims to sell three non-core
businesses, told investors last month it had a multi-year plan
in place to make the company more efficient. At the same time,
it posted a drop in second-quarter earnings and it cut its
profit forecast for the year. [ID:nN20268342]

Earlier this week, Genzyme also said it would take longer to
fix manufacturing problems — up to four years — that led to
shortages of two of its biggest drugs.

As part of the consent decree with the U.S. government,
Genzyme is required to move its filling and finishing operations
for products sold in the United States out of its plant in
Boston by Nov. 28. due to a viral contamination.

SHAREHOLDER PATIENCE

Bolstering Genzyme’s argument is the fact that its share
price has suffered from a defined set of problems that it is
working to rectify, rather than a more general concern about its
growth prospects.

“While it won’t be an immediate recovery, people ought to
and should have patience as they move through something so
serious and time consuming. But I think they are doing that,”
said RBC Capital Markets analyst Michael Yee. He has a “sector
perform” rating on Genzyme.

“If the company continues to execute on its manufacturing
supply recovery plan, fundamentals will continue to improve and
shareholders will push the stock higher,” he said.

Genzyme also has some positive developments on the horizon,
including a promising second-generation Gaucher disease drug and
an already marketed cancer drug called Campath for potential use
in treating multiple sclerosis, analysts said.

But any uncertainty over its ability to make the fix, as
well as concerns over an industry where competition is evolving,
could still weigh on investors’ minds.

In addition, Genzyme activist shareholders Relational
Investors and Carl Icahn hold 3.8 percent and 4.9 percent of
Genzyme, respectively, giving them a key role in getting a deal.
Relational and Icahn bought shares of Genzyme at roughly $61 and
$54, Citigroup analysts said.

“What’s the catalyst they offer investors: wait a few
years?” said a second source familiar with the situation, who
declined to be named. The source was not authorized to speak to
the media.

Neither Relational, nor Icahn could be reached for comment.

HOLDING TALKS, NOT HEATED NEGOTIATIONS

As contact between the sides continues, neither company’s
executives or bankers have put August vacation plans on hold
because the discussions are not yet at the round-the-clock stage
and may never get there, the first source said.

“We’re doing the dance. It’s still relatively early in the
process,” said the source, who declined to be named since he was
not authorized to speak with the media. Each side has “said what
they want and everyone’s still digesting it.”

According to the DealReporter, a financial news service
affiliated with the Financial Times Group, Sanofi is asking
Genzyme’s board to agree to give Sanofi the right to match any
potential rival bid. Such a matching rights agreement, though
not uncommon, would be accompanied by large break-up fees.

Genzyme wants a commitment to increase the current offer
with little or no conditions attached, DealReporter said.

Genzyme and Sanofi could not be reached for comment.

The long silence from the companies has spooked the market
somewhat, with fears that Sanofi could be losing interest,
traders said.

But one executive at a large drugmaker not involved in the
process said a period of extended haggling was to be expected,
given the size and complexity of the Genzyme business.

Industry analysts also are warming to the logic of Sanofi
buying Genzyme, not only to help it replace sales and earnings
lost to generics as patents on its older drugs expire, but also
to boost its overall presence in biotechnology.

Jeffrey Holford, an industry analyst at Jefferies, believes
buying Genzyme at anywhere in the range of $70 to $80 a share
would boost Sanofi’s mid-term earnings per share by more than 10
percent.
(Reporting by Jessica Hall, additional reporting by Ransdell
Pierson in New York, Ben Hirschler in London and Caroline Jacobs
in Paris; Editing by Michele Gershberg and Carol Bishopric)
(For more M&A news and our DealZone blog, go to
http://www.reuters.com/investing/news/mergers)

RPT-DEALTALK-Genzyme has little leverage to play hardball