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An Offer It Can’t Refuse: HZMP Goes After Depomed

Horizon Pharma's hostile bid will be tough for DEPO to reject

Horizon Pharma (HZNP) plunged Tuesday on news of its hostile takeover bid for Depomed (DEPO), but with HZNP stock up 160% so far this year, shareholders can afford a little pullback.

hznpHZNP has been trying to buy DEPO since March, only to be rebuffed repeatedly. Maybe DEPO didn’t get the memo that it’s open season when it comes to pharmaceuticals sector mergers and acquisitions.

With DEPO declining to even enter into a discussion, HZNP offered $3 billion, including debt, which sure looks good on paper. At $29.25 a share, Horizon Pharma’s bid represents a 42% premium to Depomed’s closing share price. Of course, DEPO added nearly 40% at one point in early trading.

Like much of the industry, Horizon’s growth plan is to do deals — it’s been on a shopping spree lately — but Depomed wants no part of this marriage (at least at the current bid.)

HZNP and DEPO Look Like a Good Fit

Again, on paper, the acquisition makes sense. Both companies are small. HZNP has a market capitalization of $5 billion, DEPO’s value stands at just $1.7 billion even after Tuesday’s action. Each company booked revenue of about $350 million over the last 12 months, and, together, they would have 13 drugs on the market.

Furthermore, Depomed would appear to be a good fit with Horizon’s portfolio of treatments for orphan diseases, which it has built up with four acquisitions in the last two years. DEPO specializes in drugs for migraines and anti-seizure medication.

Lastly, Horizon is headquartered in Ireland for tax purposes, so any acquisition would confer tax benefits on the roughly 25% stake Depomed shareholders would come to own. And the deal would immediately be accretive to earnings, HZNP says.

It might be tough for DEPO’s board to keep shareholders in line after HZNP’s hostile bid. DEPO stock has had a fine year — it was up 28% for the year-to-date before HZNP went public with its offer — but until the hostile bid, it never recovered from the beating it took after missing earnings estimates in May. It was also far below its 52-week high.)

By comparison, the market appears to be in love with HZNP’s strategy of vacuuming up everything in its path. Shares were up about 170% for the year-to-date before getting hammered for its hostile bid.

Bottom Line

If you’re a shareholder in either HZNP or DEPO, the best course of action is to hold on. DEPO stock is still below HZNP’s offer price — and it’s probably not its final offer.

With Depomed in play — and the stock now having so much to lose should the deal not go through — it’s going to be very hard for the board to hold out.

Meanwhile, the acquisition strategy that’s been so good for HZNP stock keeps rolling on.

As for this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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