Royalty Pharma offers Elan investors a chance to cash out with $6.55B deal

Elan CEO Kelly Martin

A royalty investment group believes it can one-up Elan CEO Kelly Martin on a strategy for the company's next chapter. Royalty Pharma today offered $6.55 billion to simply buy out the company, giving investors a choice between cash in hand and trusting Martin to invest the $3.25 billion Tysabri windfall wisely.

In the weeks since Elan ($ELN) agreed to sell out its interest in Tysabri to longtime partner Biogen Idec ($BIIB), Martin has been priming the pump on market rumors with plans to splurge about $3 billion on approved and experimental products. This bid from Royalty prices Elan at about 6% over its Feb. 15 close, when the investment group first expressed an interest in acquiring the company.

Once the Tysabri sale goes through in a few months, Elan will be little more than a shell company with a royalty stream due and a fat back account. That makes it a perfect play for an acquirer like Royalty, who could snap it all up and then watch the money roll in. but it would be game over for Martin, who had recommitted to making over the company with new deals.

Royalty went public with its $11-per-share offer after Elan neglected to mention to investors that there was a cash offer on the table, instead focusing on the go-it-alone approach. Elan's shares jumped 7% on the news, trading at $11.35 this morning.

Elan, which seems committed to its plan for repurchasing $1 billion in shares and spending another $3 billion or so on assets, rushed out a response this morning, noting "the highly opportunistic timing of the announcement by Royalty Pharma--a privately held investment management company--before the Company's shareholders have had the opportunity to assess and realize the full benefit of the Tysabri transaction and the partial unlocking of its value. We expect the Tysabri transaction to close in the near future."

"While Royalty Pharma has not received a formal response to its proposal and has been unsuccessful in its efforts to engage with Elan since making the proposal, Royalty Pharma remains committed to working towards a recommended transaction," the investment group said in a statement. "Royalty Pharma was, however, surprised by Elan's public announcement on Friday February 22, 2013 discussing Elan's standalone strategy but not addressing the fact that Elan had received Royalty Pharma's proposal."

Royalty conceded that Elan's management sold several good deals, including a majority interest in the failed Alzheimer's drug bapineuzumab, but their buy-side group hasn't performed nearly so well. And mirroring a trend in the industry, Royalty noted that this is a seller's market, with good assets going for a premium. Under the current scenario, Royalty added, Elan would be hard pressed to find valuable assets at a reasonable price. 

Royalty has a billion dollars in cash in hand and plans to line up the rest in debt financing.

At first blush, a number of analysts said they expected that Royalty would have to bump its offer by a few dollars per share. One unnamed analyst told The Wall Street Journal that a cash deal like Royalty's should be worth around $15 a share. And given Martin's shaky reputation at Elan for deal-making, some analysts see a buyout as the preferred choice.

"The conservative investors will say let's tender the shares because of the uncertainty about what management will do with the cash," Helvea's Olav Zilian tells Bloomberg. "It's still open as to where the cash will be reinvested and shareholders possibly have no say in that."

- see the press release
- read the release from Elan
- here's the story from The Wall Street Journal (sub. req.)

- read the Bloomberg report

Special Report: Elan - Buyout Buzz: The most frequently cited takeover targets in biotech

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