Elan Shareholders Bring Management To Heel

By Stephen D. Simpson, CFA | June 17, 2013 AAA

Financial writers often lament that shareholders are too passive with respect to exercising their rights to oppose management decisions that they disagree with and holding management to account. Well, that can't be said about Elan's (NYSE:ELN) shareholders. Shareholders handed a significant and embarrassing collection of rejections to management, a move that I would argue expresses a very wise lack of confidence in management. With this rejection of management's strategy, I would hope that Elan management sees reason and seeks out the best deal available to sell the company.

SEE: Evaluating A Company’s Management

Back To The Drawing Board...
Regrettably, as of the time of this writing, Elan had not posted the actual voting results of the extraordinary general meeting held to give investors a say on four major proposals – the Theravance (Nasdaq:THRX) royalty agreement, the AOP acquisition, the ELND005 spin-off, and the share buyback plan. What Elan did say in an uncommonly tersely-worded press release was that shareholders had rejected the first three items and accepted only the buyback plan.

At the risk of grandstanding (and not knowing how close the votes were), I'd call this is a significant wake-up call to Elan management that shareholders are not on the same page with them and do not trust them to build value through these transactions. As I've thought each of the proposed transactions (except for the buyback) were ill-conceived and highly likely to destroy shareholder value, this is a good move for shareholders.

Insofar as I understand Elan's corporate governance rules, management does not have the option to ignore these results and proceed. I mention this only because we have seen a few examples recently of companies (not Elan) where shareholders voted against particular board nominees and the company effectively ignored or overruled the votes anyway.

SEE: Ethical Investing: Investor Activism and Shareholder Advocacy

And Back To The Table
Given that companies always canvas major shareholders ahead of significant meetings/votes like this, Elan management had to know this rejection was coming. This is why I believe Elan announced on Friday (May 14th) that it was proceeding with a formal plant to sell the company.

It's worth noting that Royalty Pharma's bid lapsed with the shareholder approval of the share buyback. Nevertheless, Elan's management “invited” Royalty Pharma to participate in the sale process. Given that no other buyer has publicly expressed any interest in Elan, that's hardly a magnanimous gesture.

To be sure, Elan has some value (especially now that these ill-conceived transactions have been turfed). Elan received over $3 billion from Biogen Idec (Nasdaq:BIIB) for its stake in Tysabri, as well as potentially lucrative contingent payments. What's more, apart from a single pipeline asset (ELND005), there's not really much to the company, so it ought to be a fairly simple transaction to structure.

The question is whether anybody will step up with a better offer than Royalty. Valeant (NYSE:VRX) is seemingly always a potential interested party in such situations, but with the deal for Bausch + Lomb already announced, management will be busy enough (not to mention, with Elan based in Ireland, Valeant can't generate the major tax leverage that often drives the value of so many of its deals). I wouldn't be surprised if financial buyers (private equity) at least investigated a potential deal, at which point the bid price relative to Royalty Pharma would come down to the various opinions on the value of the Tysabri royalty stream and the respective costs of capital.

SEE: Trade Takeover Stocks With Merger Arbitrage

The Bottom Line
If Elan management cannot come up with transactions that its shareholders approve, the whole point of the Tysabri transaction (effectively paying a premium to pull forward the revenue stream) largely evaporates. On the other hand, the deals to acquire a royalty interest in Theravance's COPD drugs and all of orphan drug developer AOP didn't look like value-additive deals either.

For Theravance, this is an unfortunate development, as the Elan transaction basically overvalued its COPD assets. For Elan, we'll see what happens next. A buyout seems much more likely now, and barring a change of management, that would almost certainly be the best way for Elan shareholders to see maximal value for this asset.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies or funds mentioned in this article.

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