Advanced Medical Optics Inc.’s interest in rival Bausch & Lomb Inc. started months before its $4.3 billion takeover bid earlier this month.
The Santa Ana-based eye surgery device and contact lens care maker first approached Rochester, N.Y.-based Bausch & Lomb late last year, according to a Securities and Exchange Commission filing.
At an October meeting, Bausch directors passed on Advanced Medical’s overtures citing possible regulatory hurdles and apprehension about giving a rival a look at the company’s books.
A few months earlier, Bausch had started talks with private equity firm Warburg Pincus LLP, which made a $3.67 billion offer to take the company private in June.
After Warburg Pincus made its offer, Bausch financial adviser Morgan Stanley & Co. contacted 29 other possible suitors, including 14 healthcare companies, to solicit interest in competing bids.
Of those 29, 11 entered confidentiality pacts, including Advanced Medical.
Now Advanced Medical has trumped Warburg’s offer, offering 9% more than what Bausch was trading at before.
For now, Bausch is moving ahead on Warburg’s cash offer while continuing talks with Advanced Medical.
“The businesses complement each other and together would provide increased scale, scope and the enhanced ability to generate productivity and efficiency improvements,” Chief Executive James Mazzo said in a statement.
Bausch offers some things Advanced Medical doesn’t have,over-the-counter eye drugs and contact lenses.
Lenses “are definitely a medium we like,” Mazzo said earlier this year. “It fits our profile. It is a brand-loyal, doctor-driven business.”
Bausch’s strong name likely appeals to Advanced Medical, said Jeff Johnson, an analyst with R.W. Baird & Co. in Milwaukee.
“The Bausch & Lomb name still has significant brand equity,” he said.
The company also is getting past a 2006 recall of its ReNu MoistureLoc contact lens solution following reports of a link to a fungal eye infection, according to Johnson.
Earlier this year, Advanced Medical recalled its Complete MoisturePlus solution after federal officials found an increased rate of a rare eye infection in users.
But Advanced Medical’s bid faces challenges.
For one, it’s a big deal: Bausch had a market value of $3.7 billion last week, compared to Advanced Medical’s $2 billion.
Advanced Medical would assume about $830 million in debt from Bausch in the acquisition. It would finance the deal by raising 60% in debt and issuing shares for the rest. Advanced Medical had about $850 million in debt as of March 30.
Then there could be regulatory concerns.
The two companies compete with each other in eye surgery devices and contact lens solutions sold at stores.
A combined company could have to sell some businesses to appease regulators, according to analysts.
Potential Sell-Offs
A contact lens solution or parts of Bausch’s eye surgery business could have to be sold for a deal to go through, analysts say.
One analyst believes Bausch’s contact lens solution would be the one to stay because of the company’s better known name.
“From a marketing and consumer standpoint, I would be extremely surprised if they would at all take the Bausch & Lomb name off their product,” Johnson said. “You would not be paying what Warburg Pincus or Advanced Medical Optics are seemingly willing to pay if you were just going to get rid of the Bausch & Lomb name.”
Advanced Medical faces other issues.
ValueAct Capital Partners LP of San Francisco, the company’s third-largest shareholder at 15%, opposes the Bausch bid.
The hedge fund went as far as to call the deal “dead” last week, saying other large investors also are against it. ValueAct didn’t name the other investors said to be in opposition.
FMR Corp.’s Fidelity and MFS Investments are Advanced Medical’s largest shareholders.
ValueAct, known as an activist investor, contends the deal would expose Advanced Medical to “unnecessary risk” and doubted the company’s ability to integrate Bausch.
Advanced Medical’s Mazzo fired back in a letter to ValueAct that he was “surprised and disappointed” by the opposition given that the hedge fund earlier expressed interest in helping to finance the deal.
