By Caroline Jacobs and Nina Sovich
PARIS, Sept 3 (Reuters) - U.S. biotech company Genzyme rejected an all-cash $18.5 billion offer from French drugmaker Sanofi-Aventis this week, setting the stage for a potentially hostile takeover battle.
Sanofi Chief Executive Chris Viehbacher must weigh the risks of sweetening the offer to bring Genzyme to the negotiating table even before he is able to look at the company's books.
Or he could go hostile with the bid and forfeit a deeper study of manufacturing problems which Genzyme is facing -- problems which helped put Genzyme into play in the first place.
Genzyme Chief Executive Henri Termeer told Reuters this week he believes it is unlikely Sanofi will go hostile, but that any deal process could take months to complete. Here is a summary of how events could unfold in coming weeks:
SIT DOWN AND TALK
This outcome is possible if Sanofi-Aventis raises its bid or if Genzyme shareholders believe the French company will walk away and no other company will step in with a higher price.
Genzyme's appeal lies in the growth potential of its drugs treating rare genetic diseases and a pipeline of new treatments, including one for multiple sclerosis.
It would help Sanofi plug the loss of nearly a third of its sales from 2008 levels over the next three years as more of its top drugs lose patent protection, and provide a stronger base from which to grow than a number of smaller buys.
Many analysts believe Sanofi will raise its bid to around $70 a share to entice Genzyme management to open the company's books. The complexity of the deal and Genzyme's manufacturing problems, which led to a shortage of two of its key drugs, mean negotiations could go on for several months.
Key shareholders will help set the tone of such talks. Activist investor Carl Icahn has representatives on Genzyme's board, while Sanofi directors include officials from top shareholders L'Oreal and Total, who are expected to take a conservative view on price.
Sanofi-Aventis could win Genzyme with a sweetened offer of around $78 a share, according to a Reuters poll.
Genzyme has also shown progress in resolving its manufacturing issues, which could strengthen its case for a higher price.
"For Sanofi the question is how strong do they feel their hand is in this ... because the people it is dealing with are natural sellers," said Evo Securities analyst Dominic Valder.
GOING HOSTILE
Some believe Sanofi's next step will be to bypass Genzyme's board and present its offer straight to shareholders, though the choice carries significant risk. Viehbacher said earlier this week Sanofi would look at all options, but added he was not prepared to go to any length to acquire Genzyme.
"It would be sensible that any company, before finally closing a deal, have a look at some of that stuff," Viehbacher said, referring to Genzyme's efforts to rectify its manufacturing problems.
A London-based hedge fund manager, asking not to be named, said: "Sanofi can go to Genzyme shareholders and offer them $69 a share or tell them they can go back to a world where their stock is stuck in the $50s ... Remember, no one else wants Genzyme."
But a hostile bid carries risks, particularly if Sanofi alienates key members of Genzyme's operations. "If Sanofi went hostile and management were to go, who will show them around fixing the problems?" Nomura analyst Amit Roy said.
WALK AWAY
Sanofi might walk away from a deal after it canvasses Genzyme shareholders such as Icahn and finds they will insist on a higher price than the Sanofi board is willing to pay. Or it may decide the risks involved in fixing Genzyme's manufacturing problems are too high.
"Sometimes you have to say the deal was exposed too quickly and it's time to get out before you make a mistake. Remember Genzyme wasn't always their only choice. They had their eye on other companies," said a Paris-based banker familiar with the discussions. Sanofi could then look at buying another medium-sized company like Shire, Allergan or Biogen to expand its pipeline. But some of these may be even more expensive, while sticking to its strategy of small acquisitions may not help offset its impending revenue losses fast enough.
Alternately, Sanofi-Aventis could come back to Genzyme after a few months when the company's full-year earnings have been released. This time they would hammer out a price to buy Genzyme before the press and investors find out talks have begun.
WHITE KNIGHT
Major drugmakers will have had a look at Genzyme, but chances of a rival bidder popping up look slim.
"I don't think there's a white knight out there. I think this is the only offer Genzyme shareholders will see," said Navid Malik, analyst at Matrix Corporate Capital in London.
Genzyme's Termeer has said he has not yet authorized the company's bankers to solicit rival bids.
Johnson & Johnson and Pfizer have been flagged as possible candidates, but analysts say there is a low probability they would actually make an offer.
J&J is on the lookout for smaller takeovers and Pfizer is digesting its $67 billion takeover of Wyeth.
"The number of players who could mobilise more than $18.5 billion in cash is a pretty limited number," Viehbacher said. (Editing by David Holmes)