Starboard to Vote Against Bristol-Celgene Deal, Suggests a Sale Instead

(Bloomberg) -- Activist investor Starboard Value said it will vote against the record pharmaceutical merger of Bristol-Myers Squibb Co. and Celgene Corp., launching a shareholder campaign that could gather dissidents who want to block the deal.

Calling the takeover “poorly conceived and ill advised,” the hedge fund run by investor Jeff Smith said it will vote against the takeover, and that Bristol-Myers should either seek a buyer or remain independent.

Shares of Summit, New Jersey-based Celgene were down 8.3 percent to $83.48 at 11:55 a.m. in New York. Bristol-Myers gained 0.6 percent.

Others appear ready to join Starboard. On Wednesday, Wellington Management Co., which manages about $1 trillion in assets, said that it “does not believe that the Celgene transaction is an attractive path” for broadening Bristol-Myers’s business. The firm holds 7.7 percent of Bristol-Myers’s shares, and said it had sold some of what was until recently the biggest stake in the New York-based drugmaker.

Starboard didn’t disclose the size of its stake in Bristol-Myers in a letter Thursday. But a regulatory filing last week indicated that it held 1 million shares, or roughly a 0.6 percent stake in the company, the bulk of which were purchased on Jan. 31.

The proxy campaign by Starboard, combined with the opposition from Wellington, will create an increasingly difficult path for a deal that investors never seemed to love in the first place. Celgene shares haven’t traded at the offer price since the deal was announced. That consistent spread is a sign of investor doubts.

The combination would create a leading biopharma company with greater sales, Bristol-Myers said in a statement. Ten of its 11 directors are independent and its board is consistently refreshed, the company said.

"Bristol-Myers Squibb welcomes the opinions of all of its stockholders and will review Starboard’s letter and respond in due course," it said.

Celgene declined to comment.

“While we are very disappointed by the position of Wellington Management, we will continue our discussions with shareholders about this unique opportunity to create sustainable value,” Chief Executive Officer Giovanni Caforio said in a filing earlier Thursday.

Starboard to Vote Against Bristol-Celgene Deal, Suggests a Sale Instead

“If the deal unravels because of this opposition, there could be other players who would jump in and want to take a look at Celgene or even Bristol-Myers,” said David Toung, an analyst with Argus Research Corp. “Right now, people are buying Bristol shares because they look at the deal unraveling and see that as a positive.”

Starboard said in its letter that it plans to put forth a slate of alternative board directors at Bristol-Myers’s annual shareholders meeting to “ensure that the board is held accountable and that the company focuses on exploring and executing on the best alternative for value creation at Bristol-Myers.”

The activist investor argued in its letter that Celgene is facing a significant decline in sales of its biggest drug, the cancer treatment Revlimid, once its patents expire. It said the coming patent cliff would require the biotechnology company to replace more than 60 percent of its revenue in the next seven years -- a feat Starboard described as “mostly unprecedented.”

Celgene’s pipeline of treatments as extremely risky and that it will need substantial research and development funding, Starboard said. It noted essentially all of Celgene’s marketed products lose patent protection over the next eight years.

Starboard also found fault with what it painted as Bristol-Myers’s rush to reach a deal, saying the transaction was “hastily construed and perhaps done to thwart potential strategic interest.”

Despite the opposition, Geoff Meacham, an analyst with Barclays Plc, said Wednesday that he still expects the deal to close, in part because of a lack of other suitors for the drugmakers.

Major Investor

Wellington is one of the few supersized money managers that doesn’t own a substantial stake in both Bristol-Myers and Celgene. BlackRock Inc., Vanguard, Invesco Ltd. and State Street Corp. all have big holdings in each of the drugmakers. State Street declined to comment.

The proportion of investors who hold both companies and thus would benefit from the acquisition indicate that “it would still be an uphill battle for an activist to prevent the deal from closing,” Brian Abrahams, an analyst with RBC in London, said in a note to clients.

Wellington said that the terms of the transaction as laid out when the deal was announced ask shareholders of Bristol-Myers to shoulder too much risk. The investment firm also said that integrating the two companies could be a bigger lift than depicted by management and that “alternative paths to create value” could be more attractive.

The deal, which is expected to close in the third quarter of this year, has a termination fee of $2.2 billion, according to a securities filing.

Bristol-Myers agreed to buy Celgene in January, in a record-sized cash-and-stock deal that would unite a pair of drugmakers battling for advantage in a crowded market for innovative cancer treatments.

Both companies had faced investor wariness about their prospects before the deal was unveiled. Bristol makes an immunotherapy drug called Opdivo that accounts for roughly a quarter of its sales, but that has trailed a rival medication from Merck & Co. Celgene, meanwhile, has been looking for a follow-up for Revlimid.

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