Words not figures proved the undoing of Royalty’s hostile Elan bid

Royalty Pharma has only itself to blame for the failed hostile bid to acquire Irish biotech group Elan for up to $8 billion.

The Dublin-headquartered fund attacked Elan throughout its four-month battle over the haste and lack of planning with which it was proposing to invest all the proceeds of its sale of multiple sclerosis drug Tysabri to its US partner Biogen Idec, and more. But, ultimately, it was an error in haste by Royalty that proved its undoing.

In its offer document, it said its bid would “lapse” (ie be withdrawn) if Elan shareholders accepted any of four measures proposed by the company. It was an unnecessary and reckless move – especially as one of those measures was a buyback and that a similar exercise had already been overwhelmingly approved at a previous EGM by shareholders.

Royalty could, and should, have been more selective in its language. It might have thought the measures were being put in one resolution, as sometimes happens, but there was no inevitability about that and a beleaguered target like Elan had every right to construct its defence to make success for Royalty as difficult as possible.

Backtrack attempt
Royalty tried subsequently to backtrack, telling the Irish Takeover Panel it had not intended to walk away if shareholders back either or both of the share buyback and a spin-off of Elan's last remaining drug. The panel decided it should be held to the letter of its offer document and Royalty yesterday dropped a court challenge to that decision.

It remains to be seen whether the company will take action against its professional advisers over that slip.

There was, in any case, nothing inevitable about the takeover. Shareholders may have bloodied the nose of Elan management with their rejection of its investment plans at Monday’s extraordinary general meeting but, in its most recent update, Royalty had secured acceptances of less than 8 per cent of Elan’s stock.

The news that the sole bidder was walking away had been predicted to knock close to 30 per cent of Elan's share price – or $2 billion of its market capitalisation – by one analyst, UBS. It might happen yet but yesterday markets were altogether more sanguine.

Stock rise
The decision when it came was actually greeted with a rise in the price of Elan stock. Even before US markets opened, the shares were trading more than 1 per cent ahead at $13.65. Analysts and shareholders have clearly determined that the battle for Elan is far from over.

The company put itself on the market last Friday after it became clear it had failed to persuade shareholders of the merits of its strategic vision – essentially a hastily assembled collection of investments designed to broaden its footprint in terms of geography, treatment areas and number of revenue streams.

Elan said that it had received several expressions of interest in a takeover last week, though no further details have been disclosed. Royalty Pharma may be precluded from any further unsolicited bid for 12 months but the New York Times reported yesterday that advisers for Elan had been in touch with the company to invite it to participate.

Having consistently said Royalty’s offers undervalued the company, Elan is presumably seeking offers ahead of Royalty’s $13 guaranteed cash bid – somewhere in the $15 and $20 range that it spoke of in its defence documents.

It depends on the bidder. Yesterday, broker Jeffries raised its target for Elan from $14 to $19 a share but said $3 of that was to account for the advantageous corporate tax structure enjoyed by Elan as an Irish resident company. That does nothing for Royalty – a fund which pays no corporate tax – but it might attract others.