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Merz withdraws rival offer for Obagi

by Scott Stuart | Published April 9, 2013 at 11:57 AM

Merz Pharma Group withdrew its offer for Obagi Medical Products Inc., which is under a $420 million merger agreement with Valeant Pharmaceuticals International Inc., leaving the Valeant deal presumably to move forward on a fast track.

Acquisitive Valeant, however, pulled and refiled its application for antitrust approval last week, raising some question about whether the Federal Trade Commission wants to probe the transaction further.

Valeant announced a $19.75 per share deal March 20 to acquire Obagi, which has business in the physician-dispensed skin care markets. Merz had failed to make a firm offer before the sale to Valeant was complete and moved in with a $22 per share spoiler bid. Valeant swiftly countered with a $24 per share revised merger.

Merz said Monday it would back down because the price no longer met their economic requirements. Merz said Obagi was an opportunity worth pursuing given its complementary fit with Merz's portfolio of injectables and that it looks forward to exploring other acquisition opportunities that fit its strategy.

Obagi was seen as an opportunity for Germany's Merz to expand its foothold in North America. The company has said it had other acquisition opportunities that could address the same initiative.

Valeant and Obagi refiled applications under the Hart-Scott-Rodino rules after making an initial filing March 25 that would have had an April 9 deadline at the FTC. A filing on the tender offer with the Securities and Exchange Commission on April 5 noted that after discussions with the FTC staff on April 4, Valeant voluntarily withdrew and refiled its application. Obagi said Valeant is of the position that the refiling may facilitate the completion of the FTC's review. The move is a common maneuver by merger parties to reset the clock on the HSR waiting period. Once the waiting period expires, the FTC is obligated to clear the deal or launch a more thorough second request for information.

Since the deal is structured as a tender offer, the HSR initial review period is only 15 days and would expire on April 19. The Obagi tender offer is set to expire April 23. The companies have asked for early termination of the waiting period.

According to the Obagi annual report, the company competes with Valeant in its Kinerase aging cream product line and through BenzaClin, an acne product acquired when Valeant bought Dermik Laboratories Inc. from Sanofi in 2011 for $425 million.

The FTC decided that the Dermik deal would reduce competition between BenzaClin and its generic equivalent, marketed by Mylan Pharmaceuticals Inc., and ordered Valeant to sell rights to generic BenzaClin to Mylan. As such, it would seem that the consent order maintained viable competition between those discrete products.

Obagi states in its 10-K that it also competes against large skin care companies including SkinCeuticals, a division of L'Oreal SA, SkinMedica Inc., a division of Allergan Inc., and others, along with Kinerase. Large cosmetic companies also sell skin care products directly to consumers.

It seems at first glance, that the competition in the markets shared by Valeant and Obagi would provide adequate competition.

The FTC might have needed more time because the deal is a tender offer. Also, since Valeant on April 4 did not know whether Merz was going to make another offer or not, it may have preferred a slightly longer time frame for the FTC review rather than risk a second request during a bidding war.

Obagi shares gave up about $1.50 Monday on Merz's retreat to trade for $23.95 at a spread of 5 cents, or 0.2%, to the Valeant tender offer. Assuming the deal does close April 23, that spread represented an annualized return of 5%.

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Tags: Federal Trade Commission | Merz Pharma | Obagi Medical Products | risk arbitrage | Valeant Pharmaceuticals International

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Merz withdraws rival offer for Obagi

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