Arbs expect another bump in Obagi battle

Risk arbitrageurs are looking for yet another bump in the battle for Obagi Medical Products Inc. between serial acquirer Valeant Pharmaceuticals International Inc. and Merz Pharma Group.

Valeant on Wednesday moved quickly to counter a spoiler bid from Merz for the cosmetics and skin care company with a revised merger agreement of $24 cash per share, or $420 million. The deal has a breakup fee of $21 million, or $1.20 per share. Valeant and Obagi entered their merger agreement on March 19 at $19.75 per share. At the time, Merz had not gotten off its final bid and was conducting due diligence. Merz on Tuesday offered $22 per share and Valeant quickly trumped again.

Merz is considering its options and intends to make a determination about whether to counter with a higher proposal or withdraw by Friday.

The Frankfurt-based pharmaceutical company with a dermatology franchise has had an interest in Obagi for some time and was in discussions for several months before Valeant struck more quickly with its deal. Obagi's portfolio of dermatological products fits well with Merz's product line and the German company wants to expand into the U.S. market, so another bid could be in the offing. However, Merz, which began its Obagi bid at $18.50, believes there are other opportunities to achieve its goals.

Valeant acquired Medicis Pharmaceutical Corp. in 2012 to expand its dermatology business and moved swiftly to bid on Obagi in February during a revived sale process, but Valeant had looked at Obagi in 2009. One arb noted that while Valeant has walked from competitive bidding situations in the recent past, it has completed deals as well, and has been a catalyst for bidding wars. Since Obagi is a small cap deal it is ripe for even other bidders that took an interest during the recent auction but failed to make an offer to return, the arb said.

Obagi shares traded Wednesday for $25.20 at a premium of $1.20, or 4.7%, to the revised Valeant tender offer.

The November proxy for Valeant's acquisition of Medicis has a fairness valuation by Deutsche Bank AG, the financial adviser to Merz. That analysis places a mean multiple of comparable transactions at between 3 and 3.1 times revenue and 8.1 times Ebitda. The Medicis deal was executed at 3.2 times revenue and 9 times Ebitda, according to the proxy.

Merz estimated its $22 counterbid at 3.2 times revenue and 17.9 times Ebitda, and Valeant has topped that by another 9%. The valuation is looking full, but both companies have taken a keen interest in the asset.

Also, the 14D9 for the initial Valeant tender offer at $19.75 includes valuation matrices that touch $24 and under optimistic growth projections exceed that value.