Wednesday, December 05, 2007

Pennant Capital Said Axcan Pharma (AXCA) Buyout Price Too Low

In a 13D filing on Axcan Pharma Inc. (Nasdaq: AXCA), 9.95% holder Pennant Capital Management said they are disappointment with the $23.35 per share buyout price by TPG Capital.

The firm said, "While we support selling the Company, we believe the valuation indicated is inadequate considering the strong cash flows of the business coupled with significant net cash on the balance sheet."
Pennant Capital requested the company disclose full details of the process undertaken to realize the highest value of the company in the proxy materials.
Pennant Capital believes the Company is worth at least $25/share.
A Copy of the Letter:
Dear Chairman and Members of the Board,
We are writing to express our disappointment in the valuation that was obtained for the Company in the recently announced proposed transaction with TPG Capital. While we support selling the Company, we believe the valuation indicated is inadequate considering the strong cash flows of the business coupled with significant net cash on the balance sheet. In order to support any proposed transaction and to fully understand that management and the Board have appropriately explored all alternatives to maximize shareholder value, the proxy materials that will be provided to shareholders must disclose full details of the process undertaken to realize the highest value for the Company, the ongoing role, compensation and ownership of management and directors in the new entity and the fairness opinion.
Due to our concerns on the valuation of the transaction, the quality of the auction performed and the potential for conflicts to exist with management and the directors, shareholders require that the Board include full details of the process that was undertaken. Details of the process should include when the process started, all strategic or other investors contacted, all bids received including whether from strategic or financial buyers, any modification of bids and any periods of exclusive negotiation.
We believe that the absolute valuation of the proposed transaction is low relative to the prospects of the business. The proposed takeout price values the Company at $1.3 billion. The enterprise value is only $1 billion net of the $310 million in net cash on the balance sheet (or>$5.50 per share). Last year the Company generated over $100 million in free cash flow (FCF) and $135 million in EBITDA (excluding the one-time acquired in process R&D charge of $10 million). This implies a 10% FCF/EV yield or a multiple of 7.4x EV/EBITDA which we believe is significantly undervaluing the future cash flows of the Company. We believe the Company is worth at least $25/share using a relatively conservative 8x EBITDA multiple which still results in a high single digit FCF yield.
While the recent press release states that the acquisition was completed at a 28% premium over the average trading price of the common shares on November 28th , we believe that the more relevant time period to look at is the last 90 days over which time period most of the negotiations likely took place. The stock price over that time period averaged $19.68 with a 52-week high closing at $21.29 during that period. The premium over the average of that time period was only 19% which we consider inadequate considering the strong performance of the business (most recently demonstrated in the last quarter’s results) and the significant cash generating capabilities of the business on a go forward basis. Ironically, if the deal had been announced the day after the release of the Company’s most recent strong financial results, the premium would certainly have been smaller or perhaps non existent.
The timing of the deal announcement also causes us concern. The stock had been trading at 52 week highs, north of $20/share in October based on very strong results including beating revenue and earnings estimates for the last 8 quarters in a row, while being valued at a discount to peers and having>$5/share in net cash. A report was released recommending shorting the stock that caused a 14% decline in the share price from October 31st to the average closing the week prior to the announcement of the deal. After reviewing the report with the analyst in detail, it became clear that there was no new factual information, and in our opinion, misinterpretation of the impending risks the Company faced. This was coupled with a valuation analysis that was not reflective of the strong balance sheet, cash flows and earnings power of the Company under any scenario.
The deal was then announced concurrently with very strong revenue and earnings report that, coupled with guidance, likely would have driven a recovery in the stock price. So we are very concerned that the timing of the deal was announced so that the premium looked much more substantial than it would have if the stock had merely reacted appropriately to the latest facts about the operating and balance sheet strength of the Company.
We believe that the Company has done an outstanding job in improving the core business as continues to be evidenced by the strong financial results. We are concerned that the strength of the business is being undervalued by TPG Capital. We strongly urge the Board, as a part of their fiduciary responsibility, to fully disclose the details of the process and evaluation to allow us to assess the fairness of this transaction.
Alan P. Fournier
Managing Member
Pennant Capital Management, LLC

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