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Trying to End Contest, Boston Scientific Beefs Up Offer for Guidant

Posted on: Monday, 9 January 2006, 18:00 CST

By Steve Heuser and Jeffrey Krasner, The Boston Globe

Jan. 9--Boston Scientific Corp. strengthened its offer to buy heart-device maker Guidant Corp. yesterday in an effort to end the bidding war with rival suitor Johnson & Johnson.

The Natick company maintained its $72 a share stock-and-cash bid for Guidant's shares, worth about $25 billion, but said it has a definitive agreement to sell Guidant's vascular business to a third party, Abbott Laboratories, for $4.3 billion. That side deal is expected to allay any antitrust concerns of the Federal Trade Commission, ease the financing for gargantuan deal, and allow for a closing before April 1.

In addition, Boston Scientific put in place a financial mechanism that ensures Guidant shareholders $72 a share in value, even if Boston Scientific's shares should move 10 percent either way. One analyst said that trumps Johnson & Johnson's offer, worth $64.11 at Friday's closing stock prices.

"It's going to be exceedingly difficult for the Guidant board to recommend to shareholders they accept the Johnson & Johnson offer," said Mark Landy, an analyst with Susquehanna International Group. "They don't have to match the Boston Scientific bid dollar for dollar, but they've got to get a whole bunch closer."

But Johnson & Johnson issued a defiant statement sticking by its earlier bid and predicting it would be accepted when Guidant shareholders vote Jan. 31.

"We continue to believe that the agreed upon Johnson & Johnson deal represents a better offer for Guidant Corporation, its shareholders and its employees than the recently announced Boston Scientific proposal," said William C. Weldon, Johnson & Johnson's chief executive, in a statement. "Johnson & Johnson has the capacity to invest in Guidant's future. We intend to dedicate the resources necessary to enable Guidant to achieve a full and complete recovery in the cardiac rhythm management market, and to achieve and sustain leadership in interventional cardiology."

Weldon said his offer provided greater certainty and a quicker closing for Guidant shareholders. He also said Johnson & Johnson shares would prove to be a superior investment than Boston Scientific shares.

If accepted by management and approved by Guidant's shareholders, the deal would transform Boston Scientific into the largest heart-device maker in the world and the most valuable public company in Massachusetts.

In a brief statement, Guidant said its board would review the latest offer with help from its investment bankers and outside lawyers. The board is currently recommending that shareholders approve the $21.5 billion offer from Johnson & Johnson, agreed on in November. Should Guidant's board change its mind and favor the Boston Scientific bid, Johnson & Johnson would have five days to respond with a sweetened offer.

The bidding war over Guidant began last fall, after Guidant endured a series of embarrassing recalls of its pacemakers and defibrillators because of malfunctions. Johnson & Johnson lowered its initial $25.4 billion offer to $21.5 billion. That opened the door for Boston Scientific's bid.

Another analyst said it would hard for Johnson & Johnson to do an about-face and increase its offer. "I don't see how it's practical for J&J to come back now and raise their offer because they've said repeatedly that their last [reduced] offer represents full value," WBB Securities analyst Steve Brozak told the Reuters news service. "If they paid more and something went wrong, how would [J&J's] management rationalize that?"

Boston Scientific's offer puts an official stamp on its surprise December move to buy Guidant. It also caps weeks of examination of Guidant's finances. Guidant recently lowered its financial predictions, acknowledging that sales of its flagship implantable defibrillators have been affected more severely than anticipated by last year's recalls.

James Tobin, Boston Scientific's president and chief executive, said yesterday that his firm's study of Guidant in recent weeks found its core operations undamaged.

"We found in our due-diligence process that their sales force and engineering capabilities were largely intact, despite what they've been through for the past 15 months," Tobin said. "The assets are there, and they're intact."

In a letter to Guidant's chairman, Tobin said the offer is open until the close of business Jan. 19.

Selling Guidant's vascular business to Abbott would help Boston Scientific in several ways. Besides easing regulatory concerns, it would provide $3.8 billion in upfront cash, lowering the amount Boston Scientific would have to borrow to execute the transaction. Abbott would also lend Boston Scientific $700 million.

Boston Scientific would also retain shared rights to Guidant's drug-eluting stents under development. That could give the firm a second platform in the rapidly growing market for the drug-coated stents.

Larry Best, Boston Scientific's chief financial officer, said the company would borrow between $8.5 billion and $9 billion to complete the deal. But he predicted the combined companies would generate enormous amounts of uncommitted cash, enabling Boston Scientific to pay off its loans within five years.

The additional borrowing would lower Boston Scientific's debt rating, he said, but it would remain "investment grade." Debt ratings measure a company's ability to pay off its obligations and determine the interest rates it can obtain from lenders.

A merged company would combine Boston Scientific's industry-leading $3 billion business in drug-eluting stents with Guidant's pacemakers and implantable defibrillators.

Boston Scientific's drug-eluting Taxus stent has achieved commanding market share since being introduced in early 2004, after Johnson & Johnson introduced a drug-eluting stent called Cypher. Stents, tiny wire-mesh tubes, keep arteries open after the arteries have been cleared. The drugs prevent scar tissue from forming, which can reblock the arteries and impede blood flow to the heart.

In the past two years, Boston Scientific and Guidant have been stung by recalls of their devices. Boston Scientific recalled tens of thousands of Taxus stents because of problems implanting them, and Guidant recalled 109,000 defibrillators last June, when it was revealed they could short-circuit.

In December, Guidant also received a warning letter from the Food and Drug Administration after the agency's inspectors found quality-control problems at its defibrillator plant.

Despite Guidant's recent troubles, implantable cardioverter-defibrillators, or ICDs, are widely seen as one of the biggest growth areas in the medical-device business. Guidant is one of three major players in the ICD market, along with Medtronic Inc. and St. Jude Medical Inc., both Minnesota companies.

ICDs, implanted in the shoulder with wires leading to the heart, are designed to help shock the heart back into its normal rhythm if it threatens to stop suddenly. But they have become a flashpoint in the debate over healthcare costs. Each ICD costs $25,000 to $35,000.Medicare pays $27,000 to over $40,000 for the procedure to implant them, not counting doctors' costs.

Guidant has spent more than a year as a takeover target, first reaching a deal to be acquired by Johnson & Johnson in December 2004. That deal was valued at around $25 billion at the time, but Johnson & Johnson seized on Guidant's recall problems to push the price down last fall in an unusual public dispute over the company's value. Guidant eventually agreed to a reduced price of $63.03 a share, or around $21.5 billion.

With both boards of directors lined up behind the deal, Boston Scientific stepped in Dec. 5 with a higher offer of $72 a share, half in cash and half in stock, worth about $25.5 billion.

The deal immediately garnered praise from analysts and investors, who had seen Boston Scientific as a victim of its own success. With sales growth leveling off sooner than expected on its blockbuster Taxus stent, the company was seen as unable to muster a new product with the same growth potential. The Guidant deal offered the rich company a way to invest its strong cash flow in a new growth area.

Executives at Boston Scientific, with 2,200 employees in Massachusetts, have said they would be able to save $400 million by making cuts and cost reductions if the deal went through, although they did not specify where.

By Steve Heuser and Jeffrey Krasner

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Source: The Boston Globe

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