NeighborCare in talks to sell to rival Omnicare

First willing negotiations since 2004 takeover bid

2 sides judged `being 95% there'

Cash deal values target at about $1.6 billion

July 06, 2005|By M. William Salganik | M. William Salganik,SUN STAFF

NeighborCare Inc. said yesterday that it was in talks to sell the company to Omnicare Inc. for $34.75 a share - the first time the two rivals have willingly negotiated since Omnicare launched a takeover bid more than a year ago.

Analysts had been predicting that the two companies would talk and were likely to agree on a deal at a higher price than the $32 Omnicare had on the table in a hostile takeover bid. Yesterday's announcement marked the breaking of a stalemate and moved that scenario closer to realization.

"I don't think you'd get a joint press release without both companies being 95 percent there - although the price may move a little," Jason Gurda, an analyst with Bear, Stearns & Co. Inc., said yesterday.

Both companies declined comment beyond a terse statement including a caution that "there is no assurance that a definitive agreement will be concluded."

The potential price, a cash deal that values NeighborCare at about $1.6 billion, is 8.5 percent higher than the sweetened Omnicare offer made last month. NeighborCare urged its shareholders to reject that bid, calling it too low. By the end of the month, only 7 percent of NeighborCare's shares had been tendered.

An acquisition would end NeighborCare's brief tenure as an independent Baltimore-based public company. Split off from Pennsylvania-based nursing home chain Genesis Health Ventures 1 1/2 years ago, NeighborCare has about 500 employees in its Inner Harbor offices.

The headquarters operations would likely close or be substantially downsized if Kentucky-based Omnicare absorbs NeighborCare, in a deal projected to generate cost-saving "synergies," Gurda said, adding, "`Synergies' is usually another word for layoffs."

Results of deal

A deal would bring together Omnicare, the largest company in the institutional pharmacy business, with one of its biggest competitors. Omnicare fills prescriptions for patients in more than 1 million nursing home beds; NeighborCare serves about 300,000.

Omnicare maintains institutional pharmacies - they don't have retail operations but load pills into prepackaged doses for nursing home patients - in 47 states, and NeighborCare in 34. Areas where both have facilities could be consolidated for more savings, although Gurda said some might already be operating at capacity and unable to handle combined operations.

Given Omnicare's purchasing power, the NeighborCare portion of the business could also benefit from lower drug prices.

NeighborCare has been operating at a margin (earnings before interest, taxes, depreciation and amortization as a percentage of revenue) of 7.7 percent, according to Gurda, while Omnicare's margin is 12.4 percent. Just bringing the NeighborCare book of business up to Omnicare's margin would add millions to the bottom line, Gurda said.

NeighborCare shares closed at $34.27, up 77 cents for the day, indicating a market expectation that the deal will close somewhere near the $34.75 price being discussed. Omnicare shares jumped $2.14, closing at $45.44.

Yesterday's announcement came after a tense standoff that has lasted more than a year. Omnicare initially offered $30 a share in April 2004 in private talks with NeighborCare's board. When NeighborCare rebuffed that offer, Omnicare moved to circumvent the board by making the offer directly to shareholders. By late last year, a majority of shares had been tendered at the $30 price, but the deal required 80 percent of shares to be completed.

For a year, neither side budged. Omnicare didn't sweeten its $30 offer. NeighborCare said it wasn't interested in talking. Omnicare, known as a persistent and aggressive acquisitor, threatened to launch a proxy fight to elect new NeighborCare directors favorably disposed toward the deal.

Waiting for the FTC

The deal didn't move forward sooner, Gurda said, because of a lengthy antitrust review by the Federal Trade Commission. The commission took nearly a year to consider whether the deal would give Omnicare too much market concentration - nearly half the institutional pharmacy market. Last month, the FTC concluded that the existence of two other national operators, plus numerous smaller regional and local pharmacy suppliers, meant that the deal didn't violate antitrust laws.

"Omnicare was waiting for the review before it got more aggressive," Gurda said.

As soon as the FTC signed off, Omnicare raised its offer to $32.

Although this has been more protracted than most takeover battles, Gurda said he was not surprised that, after a long delay, it appeared to be moving toward a conclusion: "When Omnicare sets their sights on someone - relying on the skill and determination and persistence they've shown in the past - odds are, the deal's going to get done."

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