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GEN News Highlights : Aug 21, 2009

Lonza Raises the Stakes on JLL’s Push to Take Over Patheon

Patheon initially smiles on Lonza bid, which values the firm at $460 million.

Lonza has upped the ante on JLL’s push to acquire Patheon with an offer of $3.55 per Patheon restricted voting share. Patheon has initially responded favorably to Lonza’s bid, saying that it is a significant improvement on JLL’s previous unsolicited proposal of $2 per restricted voting share.

Lonza's indicated price values Patheon at roughly $460 million. Completion of the transaction is dependent on satisfactory due diligence and contingent on acquiring more than 67% of Patheon, a Toronto-based contract development and manufacturing services company. Paul Currie, the chairman of the special committee of independent directors, says that the Lonza proposal would “provide an excellent opportunity to secure the successful future development of Patheon.”

Lonza CEO, Stefan Borgas, says acquiring Patheon would provide the firm with new capabilities in finished dosage development and manufacturing for both small molecule and biological active ingredients. “With Patheon, Lonza would be in a unique position to offer its customers manufacturing capability across the complete supply chain.”

Lonza has signed a confidentiality and standstill agreement with Patheon, and the latter has agreed not to negotiate an acquisition transaction with any party other than Lonza until September 30, so due diligence can be carried out. The exclusivity period does allow Patheon to respond to any unsolicited superior acquisition proposal, subject to certain restrictions.

The private equity firm JLL first announced its intention to make a move on Patheon in December 2008. A formal offer of $2 per restricted voting share was made in March. Patheon has vehemently resisted JLL’s takeover bid, saying that the offer was opportunistic, significantly undervalued the company, did not treat all shareholders equally, and would provide far less value to shareholders than could be achieved if Patheon were to continue independently.

The company also pointed out JLL’s offer is structured as an "any and all" bid, not subject to a minimum tender condition. This structure means JLL may acquire some shares even if most shareholders reject the offer and could initiate a "creeping take-over" of Patheon without paying a fair price to shareholders. Patheon also believes JLL knows full well the real value of the company, having purchased 1,250,000 Patheon restricted voting shares, at up to $3.37 per share, between September and October 2008.

As of March 2009, JLL owned all the issued and outstanding convertible preferred shares (CPS) and special voting shares (SVS) in Patheon as well as 1.8 per cent of the issued and outstanding restricted voting shares. On conversion of the CPS into restricted voting shares, JLL would  effectively own approximately 30% of the outstanding restricted voting shares of Patheon. At the end of July, JLL did announce it intended to convert all of its CPS shares in Patheon into restricted voting shares at the previously set price of $4.77 per restricted voting share. The company is still, however, offering other existing shareholders only $2 per share.

In March, Patheon’s lawyers made a formal complaint to the Ontario securities commission. The letter stated Patheon believed the JLL bid combined with other actions by the company had breached security laws and was “coercive, abusive of the public shareholders of Patheon, and contrary to public interest”.