American Pharmaceutical Deal Boosts November Value

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Merger and acquisition activity chugged along at a healthy pace last month as private equity investors and corporate buyers, flush with cash, continued to pay exorbitant prices to buy other businesses.


Some investment bankers are especially optimistic about merger activity in 2006 just as they were at this time last year about 2005 because U.S. companies and private investors are sitting on an estimated $1.9 trillion in cash, an 8.5 percent jump from a year ago, according to a report released last week by PricewaterhouseCoopers.


All that money has to go somewhere.


“We’re going to see explosive M & A; activity in the first and second quarters of 2006,” said Robert Whyte, managing director at Morgan Joseph & Co. in Los Angeles.


Deal volume for companies that were bought or companies that bought others jumped to $9.2 billion in November, although $4 billion of that came from the unusual merger of American Pharmaceutical Partners and its majority-owned Santa Monica-based American Biosciences Inc. In October, deal volume in L.A. was $6.5 billion.


The number of announced deals, considered the most reliable gauge of merger activity, dipped to 66 last month, from 72 in October and 77 in September, according to Goldsmith-Agio-Helms, which assembled the local M & A; data for the Business Journal.


Still, overall merger volume in the U.S. remains robust, exceeding $1 trillion so far this year, up from $878 million in 2004.


Only 20 of the 66 local companies that changed hands in November disclosed their purchase price, and of those only four deals were valued at more than $100 million.


One of the largest was the $386 million purchase of Enterasys Networks by Gores Technology Group and Tennenbaum Capital Partners LLC, two Los Angeles buyout shops that joined forces for the first time.


Shareholders of Enterasys, an Andover, Mass.-based competitor of networking giant Cisco Systems, will receive $13.92 a share in cash, a 32 percent premium over the stock’s closing price on Nov. 11, the day the buyout was announced.


After being wallflowers the past few years, technology companies are finally getting looked at as takeover targets. Going-private transactions are expected to rise in the coming year, as small companies buckle under the disproportionate weight of Sarbanes-Oxley compliance.


“We’re seeing mergers and acquisitions start to happen more and more to companies with less than $150 million in market cap,” said Bryant Riley, chief executive of B. Riley & Co., an independent research firm. “It’s nonsensical being a small public company right now, and the valuation gap between large companies and small companies is only getting bigger.”


Last month, B. Riley teamed up with Robert Lee, founder of National R.V. Holdings Inc., to make a buyout offer for the motor home maker in Perris, Calif.


The group’s $92 million buyout offer, which represented a 10 percent premium, was rebuffed. Since then, National R.V. shares have soared on takeover rumors. The company recently hired Los Angeles-based Spartan Group LLC as its financial advisor to explore “strategic planning,” in the hopes of getting a better offer.


Jim Freedman, managing director at private investment bank Barrington Associates, said 2005 is shaping up as the company’s best year both in the number of deals and deal volume, with a strong backlog heading into 2006.


“It’s very strong, very solid right now and I think 2006 is probably going to be a little bit better than 2005,” he said, noting that the firm is trying to close six deals by year-end. “It’s not going to be 20 percent growth, but all indications are that because of private equity investments, valuations are higher and lenders are stable, so it’s going to be a very strong year for M & A.;”


In the past five years, private equity firms have taken a bigger slice of the M & A; pie. They are expected to make up 20 percent of all mergers and acquisitions next year, according to PricewaterhouseCoopers. That’s up from 16.7 percent of M & A; deals in 2005 and 12.7 percent in 2004.


Among the more prominent deals last month was Oaktree Capital Management LLC’s $225 million purchase with Millennium Gaming Inc. of the Meadows, a racetrack outside Pittsburgh, from Magna Entertainment Corp. The deal is conditional on the track’s winning a state slot-machine license. Magna, which owns Santa Anita, was unable to get slot machines in California race tracks, despite two propositions in 2004 that ended in defeat.


In other deals, DirectTV Group Inc., the El Segundo-based satellite television company, agreed to sell its remaining 50 percent take in Hughes Network Systems Inc. to New York-based SkyTerra Communications Inc., a unit of buyout shop Apollo Management LP, for $100 million. The company will still operate under the Hughes name and no layoffs are expected among its 1,500 employees. The deal is a boost for Apollo, a major shareholder in Sirius Satellite Radio.


The hottest sector for merger activity last month was health care. That included the sale of Home Pharmacy of California in Burbank to Walgreens Home Care, a unit of the large drug store operator, for an undisclosed price.


Home Pharmacy is one of the largest providers of home infusion therapies in Southern California and also provides nurses who administer the pharmaceuticals intravenously to patients discharged from hospitals.


“This is a segment in health care where margins are very strong, it’s highly fragmented with a lot of small competitors, and Walgreens has made a strategic push to expand in this market,” said Paul Kacik, senior vice president and head of health care investment banking at Barrington who handled the deal. “We’re going to see a lot more deals in the home healthcare space, including hospices, which are growing tremendously.”

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