U.S.
Securities and Exchange Commission
Washington,
DC 20549
NOTICE OF
EXEMPT SOLICITATION
1. Name
of the Registrant: Charles River Laboratories International, Inc.
2. Name
of person relying on exemption: JANA Partners LLC
3.
Address of person relying on exemption: 767 Fifth Avenue, 8th
Floor, New York, New York 10153
4. Written materials. Attach written
material required to be submitted pursuant to Rule 14a-6(g)(1)
Presentation
to ISS Group: Proposed Acquisition of WuXi
Pharmatech (“WX”) by Charles River Laboratories (“CRL”)
Pharmatech (“WX”) by Charles River Laboratories (“CRL”)
July
20, 2010
2
THIS
PRESENTATION IS FOR GENERAL INFORMATIONAL PURPOSES FOR ISS GROUP ONLY. IT
DOES NOT HAVE REGARD TO
THE SPECIFIC INVESTMENT OBJECTIVE, FINANCIAL SITUATION, SUITABILITY, OR THE PARTICULAR NEED OF ANY SPECIFIC PERSON
WHO MAY RECEIVE THIS PRESENTATION, AND SHOULD NOT BE TAKEN AS ADVICE ON THE MERITS OF ANY INVESTMENT DECISION.
THIS PRESENTATION DOES NOT RECOMMEND THE PURCHASE OR SALE OF ANY SECURITY. THE VIEWS EXPRESSED HEREIN
THE SPECIFIC INVESTMENT OBJECTIVE, FINANCIAL SITUATION, SUITABILITY, OR THE PARTICULAR NEED OF ANY SPECIFIC PERSON
WHO MAY RECEIVE THIS PRESENTATION, AND SHOULD NOT BE TAKEN AS ADVICE ON THE MERITS OF ANY INVESTMENT DECISION.
THIS PRESENTATION DOES NOT RECOMMEND THE PURCHASE OR SALE OF ANY SECURITY. THE VIEWS EXPRESSED HEREIN
REPRESENT
THE OPINIONS OF JANA PARTNERS LLC ("JANA PARTNERS"), WHICH OPINIONS MAY CHANGE
AT ANY TIME AND ARE BASED
ON
PUBLICLY AVAILABLE INFORMATION WITH RESPECT TO CHARLES RIVER LABORATORIES
INTERNATIONAL INC. AND WUXI
PHARMATECH (CAYMAN)
INC. (THE “ISSUERS”). CERTAIN FINANCIAL INFORMATION AND DATA USED HEREIN HAVE
BEEN DERIVED OR
OBTAINED
FROM FILINGS MADE WITH THE SECURITIES AND EXCHANGE COMMISSION (“SEC”) BY THE
ISSUERS OR OTHER COMPANIES
JANA
PARTNERS CONSIDERS COMPARABLE, AND FROM OTHER THIRD PARTY
REPORTS.
QUOTATION OF
ANALYSTS HEREIN DOES NOT NECESSARILY INDICATE THAT SUCH ANALYSTS SUPPORT THE
VIEWS EXPRESSED
HEREIN. JANA PARTNERS HAS NOT SOUGHT OR OBTAINED CONSENT FROM ANY THIRD PARTY TO THE USE OF PREVIOUSLY
PUBLISHED INFORMATION AND ANY SUCH STATEMENTS OR INFORMATION SHOULD NOT BE VIEWED AS INDICATING THE SUPPORT OF
SUCH THIRD PARTY FOR THE VIEWS EXPRESSED HEREIN. NO WARRANTY IS MADE THAT DATA OR INFORMATION, WHETHER DERIVED
OR OBTAINED FROM FILINGS MADE WITH THE SEC OR FROM ANY THIRD PARTY, ARE ACCURATE.
HEREIN. JANA PARTNERS HAS NOT SOUGHT OR OBTAINED CONSENT FROM ANY THIRD PARTY TO THE USE OF PREVIOUSLY
PUBLISHED INFORMATION AND ANY SUCH STATEMENTS OR INFORMATION SHOULD NOT BE VIEWED AS INDICATING THE SUPPORT OF
SUCH THIRD PARTY FOR THE VIEWS EXPRESSED HEREIN. NO WARRANTY IS MADE THAT DATA OR INFORMATION, WHETHER DERIVED
OR OBTAINED FROM FILINGS MADE WITH THE SEC OR FROM ANY THIRD PARTY, ARE ACCURATE.
JANA
PARTNERS SHALL NOT BE RESPONSIBLE OR HAVE ANY LIABILITY FOR ANY MISINFORMATION
CONTAINED IN ANY SEC FILING OR
THIRD PARTY REPORT. THERE IS NO ASSURANCE OR GUARANTEE WITH RESPECT TO THE PRICES AT WHICH ANY SECURITIES OF THE
ISSUERS WILL TRADE, AND SUCH SECURITIES MAY NOT TRADE AT PRICES THAT MAY BE IMPLIED HEREIN. THE ESTIMATES,
PROJECTIONS, PRO FORMA INFORMATION AND POTENTIAL IMPACT OF TRANSACTIONS DISCUSSED HEREIN ARE BASED ON
ASSUMPTIONS WHICH JANA PARTNERS BELIEVES TO BE REASONABLE, BUT THERE CAN BE NO ASSURANCE OR GUARANTEE THAT
ACTUAL RESULTS OR PERFORMANCE OF THE ISSUERS WILL NOT DIFFER, AND SUCH DIFFERENCES MAY BE MATERIAL. JANA
PARTNERS DISCLAIMS ANY OBLIGATION TO UPDATE THE INFORMATION CONTAINED HEREIN.
THIRD PARTY REPORT. THERE IS NO ASSURANCE OR GUARANTEE WITH RESPECT TO THE PRICES AT WHICH ANY SECURITIES OF THE
ISSUERS WILL TRADE, AND SUCH SECURITIES MAY NOT TRADE AT PRICES THAT MAY BE IMPLIED HEREIN. THE ESTIMATES,
PROJECTIONS, PRO FORMA INFORMATION AND POTENTIAL IMPACT OF TRANSACTIONS DISCUSSED HEREIN ARE BASED ON
ASSUMPTIONS WHICH JANA PARTNERS BELIEVES TO BE REASONABLE, BUT THERE CAN BE NO ASSURANCE OR GUARANTEE THAT
ACTUAL RESULTS OR PERFORMANCE OF THE ISSUERS WILL NOT DIFFER, AND SUCH DIFFERENCES MAY BE MATERIAL. JANA
PARTNERS DISCLAIMS ANY OBLIGATION TO UPDATE THE INFORMATION CONTAINED HEREIN.
JANA
PARTNERS AND ITS AFFILIATES CURRENTLY HOLD A SUBSTANTIAL AMOUNT OF SHARES OF
COMMON STOCK OF CHARLES RIVER
LABORATORIES INTERNATIONAL INC. AND JANA PARTNERS IS IN THE BUSINESS OF INVESTING IN AND TRADING SECURITIES. JANA
PARTNERS AND ITS AFFILIATES MAY FROM TIME TO TIME SELL ALL OR A PORTION OF SUCH SHARES IN OPEN MARKET TRANSACTIONS
OR OTHERWISE (INCLUDING VIA SHORT SALES), BUY ADDITIONAL SHARES (IN OPEN MARKET OR PRIVATELY NEGOTIATED
TRANSACTIONS OR OTHERWISE), OR TRADE IN OPTIONS, PUTS, CALLS OR OTHER DERIVATIVE INSTRUMENTS RELATING TO SUCH
SHARES. JANA PARTNERS ALSO RESERVES THE RIGHT TO TAKE ANY ACTIONS WITH RESPECT TO ITS INVESTMENT IN CHARLES RIVER
LABORATORIES INTERNATIONAL INC. AS IT MAY DEEM APPROPRIATE, INCLUDING, BUT NOT LIMITED TO, COMMUNICATING WITH
MANAGEMENT, THE BOARD OF DIRECTORS AND OTHER INVESTORS.
LABORATORIES INTERNATIONAL INC. AND JANA PARTNERS IS IN THE BUSINESS OF INVESTING IN AND TRADING SECURITIES. JANA
PARTNERS AND ITS AFFILIATES MAY FROM TIME TO TIME SELL ALL OR A PORTION OF SUCH SHARES IN OPEN MARKET TRANSACTIONS
OR OTHERWISE (INCLUDING VIA SHORT SALES), BUY ADDITIONAL SHARES (IN OPEN MARKET OR PRIVATELY NEGOTIATED
TRANSACTIONS OR OTHERWISE), OR TRADE IN OPTIONS, PUTS, CALLS OR OTHER DERIVATIVE INSTRUMENTS RELATING TO SUCH
SHARES. JANA PARTNERS ALSO RESERVES THE RIGHT TO TAKE ANY ACTIONS WITH RESPECT TO ITS INVESTMENT IN CHARLES RIVER
LABORATORIES INTERNATIONAL INC. AS IT MAY DEEM APPROPRIATE, INCLUDING, BUT NOT LIMITED TO, COMMUNICATING WITH
MANAGEMENT, THE BOARD OF DIRECTORS AND OTHER INVESTORS.
NOTHING
CONTAINED IN THIS PRESENTATION IS INTENDED TO BE, NOR SHOULD IT BE CONSTRUED OR
USED AS, INVESTMENT, TAX,
LEGAL OR FINANCIAL ADVICE, AN OPINION OF THE APPROPRIATENESS OF ANY SECURITY OR INVESTMENT, OR AN OFFER, OR THE
SOLICITATION OF ANY OFFER, TO BUY OR SELL ANY SECURITY OR INVESTMENT.
LEGAL OR FINANCIAL ADVICE, AN OPINION OF THE APPROPRIATENESS OF ANY SECURITY OR INVESTMENT, OR AN OFFER, OR THE
SOLICITATION OF ANY OFFER, TO BUY OR SELL ANY SECURITY OR INVESTMENT.
Overview
4
JANA
Partners Strongly Opposes the Proposed Acquisition of WuXi
„ Purported strategic
rationale of combining preclinical and discovery services has
found almost no support
found almost no support
„ Proposed synergies
are highly speculative and run counter to established industry
dynamics, and significant integration risk makes realization of even limited
synergies challenging
dynamics, and significant integration risk makes realization of even limited
synergies challenging
„ Charles River’s poor
track record of integration and overall history of capital
allocation has been highly disappointing
allocation has been highly disappointing
„ WuXi valuation is
excessive and relies on highly aggressive assumptions
„ Even assuming
synergies were realistic and that Charles River can overcome
significant integration risk and its own history, and accepting aggressive WuXi
growth and margin assumptions, the proposed acquisition would still generate
inadequate returns
significant integration risk and its own history, and accepting aggressive WuXi
growth and margin assumptions, the proposed acquisition would still generate
inadequate returns
„ There are much more
promising avenues to create immediate and certain
shareholder value, after years of significant underperformance
shareholder value, after years of significant underperformance
Lack
of Supportable Strategic Rationale and Significant
Risks
6
Street
Reaction
“We
still see the valuation premium applied as aggressive and the rationale for
combination lacking
enough supporting evidence to assuage all concerns. We do believe that the combined entity will be
competitively differentiated, but we’re unconvinced that it will be materially competitively advantaged.” - R.W.
Baird, May 12, 2010
enough supporting evidence to assuage all concerns. We do believe that the combined entity will be
competitively differentiated, but we’re unconvinced that it will be materially competitively advantaged.” - R.W.
Baird, May 12, 2010
“[WuXi]
stands to benefit from this transaction more than [Charles River].” -
Lazard,
June 15, 2010
“[W]e
continue to see the proposed WX acquisition reducing the value of CRL shares.” -
Lazard,
July 15,
2010
2010
“During
our conversations with industry participants, the subject of the Charles
River-Wuxi proposed merger
often emerged. From the strategic perspective of synergies between discovery services and existing
preclinical capabilities, we did not encounter a single individual who agreed with the transaction
and/or thought that it would clearly provide a benefit to the resulting entity. In our view, this further validates
investor concerns over the merits of the transaction.” - Raymond James, June 17, 2010
often emerged. From the strategic perspective of synergies between discovery services and existing
preclinical capabilities, we did not encounter a single individual who agreed with the transaction
and/or thought that it would clearly provide a benefit to the resulting entity. In our view, this further validates
investor concerns over the merits of the transaction.” - Raymond James, June 17, 2010
[R]evenue synergies
tend to be elusive in nature and particularly hard to capture relative to
service based
transactions. Therefore, we expect shareholders to discount the revenue synergy potential of the
transaction and remain generally against the proposed [WuXi] transaction.” - Deutsche Bank, July 13, 2010
transactions. Therefore, we expect shareholders to discount the revenue synergy potential of the
transaction and remain generally against the proposed [WuXi] transaction.” - Deutsche Bank, July 13, 2010
“Neuberger Berman has been a patient long term stockholder of CRL,
waiting for a reasonable return on the
investment made on behalf of our clients ... In our opinion, the proposed transaction with WuXi represents an
unacceptable elevation of financial and operational risks to CRL, and therefore, our investment.” - Neuberger
Berman LLC, June 16, 2010
investment made on behalf of our clients ... In our opinion, the proposed transaction with WuXi represents an
unacceptable elevation of financial and operational risks to CRL, and therefore, our investment.” - Neuberger
Berman LLC, June 16, 2010
Note: Quotation
of analysts and investment firms herein does not necessarily indicate that such
analysts or investment firms support the views expressed herein. Please
see end
notes at the end of this presentation for full citation list.
notes at the end of this presentation for full citation list.
7
„ Customer
and drug research process not well suited for integrated WuXi / Charles River
Offering and
WuXi’s discovery offering too far removed from Charles River’s toxicology offering to generate significant
cross-selling opportunities
WuXi’s discovery offering too far removed from Charles River’s toxicology offering to generate significant
cross-selling opportunities
Expert
Reaction
The
research process is very complex which is why the pharmaceutical industry has
kept separate decision makers at each
stage. Discovery scientists do not make decisions on preclinical work and vice versa. Moreover, they are usually in different
buildings, if not different cities or countries. - Former CEO of diversified preclinical CRO
stage. Discovery scientists do not make decisions on preclinical work and vice versa. Moreover, they are usually in different
buildings, if not different cities or countries. - Former CEO of diversified preclinical CRO
CROs do
not sell everything to just one chief scientific professor. ‘A lot of times
biologists don’t even talk to chemists.’ At
my
company, there are a few decision makers for the range of preclinical work. Preclinical outsourcing decisions are made at a
lower level in the organization because they are less critical. Charles River does not have experience managing a discovery
business which increases risk of transaction. - Executive in preclinical development at leading biotechnology company
company, there are a few decision makers for the range of preclinical work. Preclinical outsourcing decisions are made at a
lower level in the organization because they are less critical. Charles River does not have experience managing a discovery
business which increases risk of transaction. - Executive in preclinical development at leading biotechnology company
CROs
selection is based on particular service needed. Breadth of service not an
important factor. Decision making is
decentralized and based on individual project/team. Do not think Charles River / WuXi combination will change sales process.
- Executive in Medical Affairs at leading pharmaceutical company
decentralized and based on individual project/team. Do not think Charles River / WuXi combination will change sales process.
- Executive in Medical Affairs at leading pharmaceutical company
WuXi
combo is highly unproven. WuXi is too early in process to hook into a toxicology
sale. Does not make sense to buy
toxicology services years in advance. Also potential to lose contact with molecule after discovery chemistry when it is brought
back in-house by some customers for further work, so low probability of cross sell to Charles River’s toxicology. - Former
senior executive of leading preclinical CRO
toxicology services years in advance. Also potential to lose contact with molecule after discovery chemistry when it is brought
back in-house by some customers for further work, so low probability of cross sell to Charles River’s toxicology. - Former
senior executive of leading preclinical CRO
It does
not make sense to bundle chemistry (WuXi) and toxicology (Charles River)
together. - Senior
project manager for drug
development at leading pharmaceutical company, formerly project manager at a CRO
development at leading pharmaceutical company, formerly project manager at a CRO
Note: Excerpts
presented here are summaries and do not purport to be direct quotes. The use of
such summaries herein does not necessarily indicate that such individuals
support the
views expressed herein.
views expressed herein.
JANA
engaged with 20+ experts including several current and former executives at
preclinical CROs,
several current and former executives in drug development and outsourcing at pharmaceutical and
biotechnology companies, and private investors in CROs, many of whom voiced similar concerns.
several current and former executives in drug development and outsourcing at pharmaceutical and
biotechnology companies, and private investors in CROs, many of whom voiced similar concerns.
8
„ Any
success with integrated offering will come at the expense of lower pricing and
margins
„ WuXi’s
core business is facing increased competition and further standalone growth will
be much
more challenging without the combination with Charles River
more challenging without the combination with Charles River
Expert
Reaction (cont.)
When
entering an arrangement for a broader offering with a CRO, we look for across
the board pricing improvement.
-
Executive
managing outsourcing for leading pharmaceutical company
Shanghai is becoming
quite expensive for chemistry professionals and how do they grow revenue?
WuXi’s core strength
is in an area (medicinal chemistry) that is becoming commoditized. - Former executive in strategic sourcing/outsourcing for
preclinical development at leading pharmaceutical company
is in an area (medicinal chemistry) that is becoming commoditized. - Former executive in strategic sourcing/outsourcing for
preclinical development at leading pharmaceutical company
Without
Charles River, WuXi will take a while to grow pharmacology / toxicology on its
own. Chemistry
outsourcing is
driven by cost and volume. - Senior executive responsible for outsourcing at leading pharmaceutical company
driven by cost and volume. - Senior executive responsible for outsourcing at leading pharmaceutical company
Note: Excerpts
presented here are summaries and do not purport to be direct quotes. The use of
such summaries herein does not necessarily indicate that such individuals
support the
views expressed herein.
views expressed herein.
9
Charles
River stock price dropped 16% on deal announcement … Recovery corresponds to
rise in
shareholder opposition to WX transaction.
shareholder opposition to WX transaction.
Market
Reaction
(1) “We know
that there is a large contingent of shareholders unhappy with the valuation and
strategy.”; Eric W. Coldwell, Nicholas Juhle; Robert W. Baird & Co., May 12,
2010.
CRL/WX
announced
JANA
13D
filing
filing
Neuberger Berman 13D
filing
… Followed by Relational
opposition
… Followed by Relational
opposition
Reports
of
Opposition to WX
Transaction (1)
Opposition to WX
Transaction (1)
10
Market
Reaction (cont.)
The
market viewed the deal unfavorably even before public shareholder opposition
surfaced.
Note:
Through July 14, 2010.
(1)Assumes 12/31/2010
transaction close.
(2)“We know that there
is a large contingent of shareholders unhappy with the valuation and strategy.”;
Eric W. Coldwell, Nicholas Juhle; Robert W. Baird & Co., May 12,
2010.
(3)Per Barclays Capital
research. As of
July 2, 2010.
JANA
13D filing
13D filing
Current
Median Deal
Spread(3)
Spread(3)
Reports
of
Opposition to WX
Transaction (2)
Opposition to WX
Transaction (2)
Expanding
deal spread illustrates market does not subscribe to deal
rationale.
11
Market
Reaction (cont.)
Note:
Through June 8, 2010.
(1) “We know
that there is a large contingent of shareholders unhappy with the valuation and
strategy.”; Eric W. Coldwell, Nicholas Juhle; Robert W. Baird & Co., May 12,
2010.
Charles
River underperformance continued after market digested Covance’s worse
earnings
report and only reversed as opposition to the deal spread through the market after May 12th.
report and only reversed as opposition to the deal spread through the market after May 12th.
Charles
River materially underperforms peer Covance even after factoring in reaction to
each
company’s Q1 earnings.
company’s Q1 earnings.
CRL/WX
announced
Covance
earnings
earnings
§ Reports of
Opposition to WX
Transaction(1)
Transaction(1)
§ JANA due
diligence and acquiring 7%
position
position
JANA
13D
filing
filing
|
Stock
Price Performance pre/post Deal Opposition
|
||
|
|
April
23 - May 12
|
May
12 - June 8
|
|
S&P
500
|
(4)%
|
(10)%
|
|
Charles
River
|
(22)%
|
3%
|
|
Covance
|
(11)%
|
(11)%
|
Highly
Questionable Strategic Merits and Significant Integration
Risk
13
While
some Charles River investors may be drawn to China, the proposed combination
with WuXi fails
to provide Charles River shareholders with any material incremental benefits.
to provide Charles River shareholders with any material incremental benefits.
„Integrated offering
of discovery and preclinical services unlikely to yield material cross-selling
synergies
because not a logical cross-sell
because not a logical cross-sell
§ Fragmented R&D
process means customers not set up to buy integrated offering of unrelated
processes
§ Separate decisions
often made by different decision makers with different scientific expertise
often
separated by facility, city or even country
separated by facility, city or even country
§ Significant time
lapse (often years) between discovery and preclinical work greatly reduces
likelihood that
discovery and preclinical outsourcing decisions will be made at the same time
discovery and preclinical outsourcing decisions will be made at the same time
Claimed
Benefits Run Counter to Industry Dynamics and
Experience, Present Significant Risks
Experience, Present Significant Risks
Chart
Source: Pharmaceutical
Industry Profile 2008 (PhRMA, March 2008, p.4).
Integrated
discovery and preclinical offering is unlikely to generate significant revenue
synergies.
3-6
Years
6-7
Years
½ -2
Years
Clinical
Trials
Drug
Discovery
Preclinical
FDA
Review
Lg-Scale
Mfg
One
FDA-
Approved
Drug
Approved
Drug
5
250
5,000-10,000
Compounds
Compounds
14
„ Revenue synergies
notoriously difficult to generate in this sector(1)
„ Client consideration
of reducing number of suppliers has been gradual and is mostly in the
clinical sector
(not discovery or preclinical) where there are dozens of CROs and modest barriers to entry(2)
(not discovery or preclinical) where there are dozens of CROs and modest barriers to entry(2)
„ Even when integrated
offering leads to cross-sale, usually combined sale made through
“purchasing
department” leading to discounting
department” leading to discounting
§ Integrated sale
leads to pricing pressure along with having to reconcile the companies’
differential pricing
models(3)
models(3)
„ Cross-selling
challenging to sales force given high degree of specialization / distinct
pricing model for each
company’s offering
company’s offering
§ Charles River’s
sales force will be stretched having to sell three highly specialized offerings
(discovery,
research models and preclinical services) given WuXi brings along a minimal sales effort
research models and preclinical services) given WuXi brings along a minimal sales effort
„ Unlikely to achieve
announced SG&A cost synergies given WuXi has minimal sales force and
achieving
cross-selling revenue synergies from specialized discovery sales would require CRL to expand its sales
force
cross-selling revenue synergies from specialized discovery sales would require CRL to expand its sales
force
(1) For example, Deutsche
Bank has noted that “[R]evenue synergies tend to be elusive in nature and
particularly hard to capture relative to service based transactions.” “CRL
updates
synergy target and receives 2nd request from FTC”; Ross Muken, Michael Cherny and Vijay Kumar; Deutsche Bank Securities Inc., July 13, 2010.
synergy target and receives 2nd request from FTC”; Ross Muken, Michael Cherny and Vijay Kumar; Deutsche Bank Securities Inc., July 13, 2010.
(2) Survey of clinical
providers and sponsors as performed by the Avoca Group and presented on July 1,
2010 on a Jefferies & Company Inc. conference call.
(3) Bank of America
Merrill Lynch for example has expressed concerns regarding “potential
cannibalization of sales from having a different pricing model in the US/EU vs.
Asia.” “Merger
assumptions leave little room for error”; Eric Lo, Eric H. Chang; Bank of America Merrill Lynch, June 2, 2010.
assumptions leave little room for error”; Eric Lo, Eric H. Chang; Bank of America Merrill Lynch, June 2, 2010.
Significant
integration risk, plus risk of margin erosion from any successful combined
offering.
Claimed
Benefits Run Counter to Industry Dynamics and
Experience, Present Significant Risks (cont.)
Experience, Present Significant Risks (cont.)
15
CRL
has Struggled to Generate Appropriate Returns and
With Integration
With Integration
Margin
Comparison (CRL PCS - Covance Early Stage)(1)
Charles
River Preclinical Return on Investment(2)
-
8%
-
6%
-
4%
-
2%
0%
2%
4%
6%
2002
2003
2004
2005
2006
2007
2008
2009
1Q10
EBIT
Margin Diff
EBITDA
Margin Diff
„ $1.5 billion
acquisition of Inveresk in 2004 was meant to enhance existing preclinical
offering and generate cross-selling
synergies from Inveresk’s late stage outsourced offering. However CRL failed to successfully integrate Inveresk’s late stage
offering, selling it for a substantial loss
synergies from Inveresk’s late stage outsourced offering. However CRL failed to successfully integrate Inveresk’s late stage
offering, selling it for a substantial loss
„ Despite a high
degree of experience in the preclinical business, Charles River significantly
overpaid for Inveresk, ultimately
resulting in a $700 million write-down of preclinical goodwill
resulting in a $700 million write-down of preclinical goodwill
„ Despite substantial
scale benefits from Inveresk acquisition and over $600 million in additional
investment over the past five
years, poor integration resulted in combined preclinical margin deterioration at a time when a close peer exhibited margin
expansion and the business never generated an acceptable return
years, poor integration resulted in combined preclinical margin deterioration at a time when a close peer exhibited margin
expansion and the business never generated an acceptable return
„ That CRL misjudged
the acquisition of a business they knew well (preclinical) raises questions
about their
ability to evaluate
a business they do not know (discovery)
a business they do not know (discovery)
(1) Charles River margins
pro forma to include Inveresk prior to transaction close. Margins exclude
acquisition related expenses, impairment and write-downs.
(2) (1) Tax-effected
segment operating income at assumed 30% tax rate divided by (2) period end
segment long-term assets, adding back goodwill write-downs and including other
intangible assets.
(3) ”Putting on its
Marketing Hat”; David Windley, Timothy C. Evans, Andrew Hilgenbrink, Ph.D.;
Jefferies & Company, Inc., June 2, 2010.
(4) “Charles River
Laboratories”; Eric W. Coldwell, Nicholas Juhle; Robert W. Baird & Co., May
12, 2010.
"Investors
must bet against history to believe that [Charles River] can integrate [WuXi]
without a stumble."(3)
“Past
acquisitions haven’t been [CRL’s] strong point, nor have the majority panned out
across the industry.”(4)
High
Valuation and Inadequate Returns
17
WuXi:
Excessive Valuation on Aggressive Assumptions
„ Proposed WX
acquisition price is excessive at 16x 2010 EBITDA — nearly 56x “cash”
earnings(1) —
and
relative to CRL’s high single-digit EBITDA multiple valuation
relative to CRL’s high single-digit EBITDA multiple valuation
§ Compounded by
issuing stock well below intrinsic value(2) and when preclinical
earnings down 50%
§ WX CEO sold stock
more than 50% below CRL offer price; offer price is minimal premium to
post-IPO
private equity investor initial cost, suggesting future standalone business prospects are very
challenging
private equity investor initial cost, suggesting future standalone business prospects are very
challenging
„ Despite raising 2010
guidance, WX projections are aggressive, requiring reversal of negative trends
and
robust results from unproven businesses
robust results from unproven businesses
§ Assume
reacceleration in revenue growth (after deceleration) and margin improvement
(gross margin
declining annually since 2003 with management guiding a further decline for 2010) despite labor cost
inflation in China pressuring margins
declining annually since 2003 with management guiding a further decline for 2010) despite labor cost
inflation in China pressuring margins
§ “To reach
expectations will require sustainable Lab services growth and successful
execution in two
relatively early stage businesses (tox and manufacturing) while driving margin expansion in the face of
pricing pressure.”(3)
relatively early stage businesses (tox and manufacturing) while driving margin expansion in the face of
pricing pressure.”(3)
§ “WX's new guidance
is still well below the forecasts given…This makes the 6/1 proxy
forecasts
aggressive.”(4)
aggressive.”(4)
„ WX’s primary
competitive advantages of scale and cost and are not sustainable, putting
projections at risk
§ Chinese competitors
reaching scale (#2 competitor employing almost half the chemists as WX)
impacting WX margins
impacting WX margins
§ India offers a
promising new geography given lower labor costs and highly skilled
workforce
(1) See JANA 13D, June
16, 2010 for “cash” earnings calculation.
(2) “[A] split of CRL
could unlock shareholder value that is equivalent to $47 per share”; “CRL: Time
to unlock value; we see $6/share from recap, $11/share from an RMS/PCS
split”;
Stephen Unger, William Hite; Lazard Capital Markets, Inc., June 17, 2010.
Stephen Unger, William Hite; Lazard Capital Markets, Inc., June 17, 2010.
(3) “Merger assumptions
leave little room for error”; Eric Lo, Eric H. Chang; Bank of America Merrill
Lynch, June 2, 2010.
(4) “Pre-announcement
Adds Arrow to CRL Quiver”; David Windley, Timothy C. Evans, Andrew Hilgenbrink;
Jefferies & Company Inc., July, 15 2010.
Even
assuming strategic benefits from the WuXi deal, excessive price destroys
shareholder value.
18
(1) Midpoint of JPMorgan
calculated WX WACC per latest CRL proxy.
(2) Charles River has
previously communicated to shareholders a mid teens return requirement on
investments.
(3) $350MM of additional
revenue synergies (beyond the newly announced revenue synergies) which would be
required to achieve return requirement, assuming a 30% operating margin and a
25% tax rate.
Note: Please
see the end notes at the end of this presentation for returns calculation
information.
Returns
Inadequate Even Under Most Optimistic
Scenarios
Scenarios
Even
if one assumes synergies are realistic and that Charles River can overcome
significant
integration risk and its own history, and accepting aggressive WuXi growth and margin
assumptions, the proposed acquisition would still fail to return its 12% cost of capital(1) by 2015.
integration risk and its own history, and accepting aggressive WuXi growth and margin
assumptions, the proposed acquisition would still fail to return its 12% cost of capital(1) by 2015.
To
achieve CRL’s 15% return requirement by 2015 requires $350MM of additional
revenue synergies.(2)(3)
19
„ Charles River has
much more promising and straightforward means to create greater and more
immediate
shareholder value than a WuXi acquisition
shareholder value than a WuXi acquisition
„ For example, could
employ the same amount of leverage it would assume in a WuXi acquisition
to
repurchase 30% of its undervalued shares at a 10% premium to current share price, without any integration
risk
repurchase 30% of its undervalued shares at a 10% premium to current share price, without any integration
risk
§ Would result in
accretion to 2011 earnings per share of approximately 14% based on recent share
prices,
with accretion continuing to grow thereafter
with accretion continuing to grow thereafter
§ Leverage would
likely instill greater capital discipline
„ Given history as a
leveraged buyout, robust private equity activity in the CRO space, minimal
synergies
between its research models and preclinical segments and recent published reports, a sale or break-up
potentially represents another means of creating greater shareholder value
between its research models and preclinical segments and recent published reports, a sale or break-up
potentially represents another means of creating greater shareholder value
More
Promising Means to Create Shareholder Value
20
End
Notes
Page
6 Full Citations:
- “Charles River
Laboratories”; Eric W. Coldwell, Nicholas Juhle; Robert W. Baird & Co., May
12, 2010.
- “CRL: Argument
for WX completion continues to evolve; does management intend
to change the terms and avoid vote?”; Stephen Unger and
William Hite; Lazard Capital Markets, June 15, 2010.
William Hite; Lazard Capital Markets, June 15, 2010.
- Neuberger Berman
Group LLC, Schedule 13D, filed with the SEC June 16, 2010.
- “DIA: Exhibitor
Conversation Takeaways”; Alexander Y. Draper and Jake Hausman; Raymond James
& Associates; June 17, 2010.
- “CRL updates
synergy target and receives 2nd request from FTC”;
Ross Muken, Michael Cherny and Vijay Kumar; Deutsche Bank Securities
Inc.; July 13, 2010.
Inc.; July 13, 2010.
- “CRL: Too
little, too late? CRL is
trying very hard to get shareholders comfortable; a ‘No’ vote looks imminent;
BUY”; Stephen Unger and William
Hite; Lazard Capital Markets, July 15, 2010.
Hite; Lazard Capital Markets, July 15, 2010.
Note: Quotation
of analysts and investment firms herein does not necessarily indicate that such
analysts or investment firms support the views
expressed herein.
expressed herein.
Page
18 Return Calculation Details:
-
Returns
calculated by dividing (1) the sum of GAAP net income and depreciation &
amortization by (2) the sum of Charles River stock and cash
consideration, conversion of WuXi options, WuXi net debt assumed, deal related expenses and WuXi capital expenditures. Synergies (a)
incorporate the announced $20MM of pre-tax cost synergies taxed at a 25% tax rate in 2011 and thereafter, (b) assume a one-time pre-tax
restructuring charge of $30MM which is included in invested capital and (c) include newly announced revenue synergies of $100MM in 2013 (the
high-end of Charles River synergy guidance) and initial revenue synergies of $33MM in 2011 and $67MM in 2012, in each case at an assumed
30% operating margin, growing in-line with operating income projections thereafter and taxed at a 25% tax rate. WuXi GAAP net income through
2012 based on adjusted operating income projections per Charles River’s latest proxy statement, 14% tax rate per midpoint of WuXi 2010
guidance, and assumes $9MM reduction for after tax share based compensation per 2009 actual results. 2013-2015 WuXi operating income
growth rate based on Jefferies’ research projected growth rate of operating income for the same period. Depreciation expense through 2012
based on difference between WuXi adjusted EBITDA and operating income estimates per Charles River’s latest proxy statement; thereafter
assumed to grow in-line with capital expenditure growth rate. 2011-2015 capital expenditures per Jefferies’ research estimates. Charles River
stock consideration valued per Charles River transaction presentations, using Charles River closing price of 4/23/2010 (closing price prior to
transaction announcement) and based on 75MM diluted WuXi shares, for a total stock and cash consideration of $1.6 billion. Conversion of WuXi
options valued at $39MM per Charles River proxy. Deal related expenses include Credit Suisse seller advisory fee (not disclosed but assumed to
be equivalent to $12MM JP Morgan buyer advisory fee) and assumed $24MM in financing fees related to Charles River’s $1.2bn credit facility.
consideration, conversion of WuXi options, WuXi net debt assumed, deal related expenses and WuXi capital expenditures. Synergies (a)
incorporate the announced $20MM of pre-tax cost synergies taxed at a 25% tax rate in 2011 and thereafter, (b) assume a one-time pre-tax
restructuring charge of $30MM which is included in invested capital and (c) include newly announced revenue synergies of $100MM in 2013 (the
high-end of Charles River synergy guidance) and initial revenue synergies of $33MM in 2011 and $67MM in 2012, in each case at an assumed
30% operating margin, growing in-line with operating income projections thereafter and taxed at a 25% tax rate. WuXi GAAP net income through
2012 based on adjusted operating income projections per Charles River’s latest proxy statement, 14% tax rate per midpoint of WuXi 2010
guidance, and assumes $9MM reduction for after tax share based compensation per 2009 actual results. 2013-2015 WuXi operating income
growth rate based on Jefferies’ research projected growth rate of operating income for the same period. Depreciation expense through 2012
based on difference between WuXi adjusted EBITDA and operating income estimates per Charles River’s latest proxy statement; thereafter
assumed to grow in-line with capital expenditure growth rate. 2011-2015 capital expenditures per Jefferies’ research estimates. Charles River
stock consideration valued per Charles River transaction presentations, using Charles River closing price of 4/23/2010 (closing price prior to
transaction announcement) and based on 75MM diluted WuXi shares, for a total stock and cash consideration of $1.6 billion. Conversion of WuXi
options valued at $39MM per Charles River proxy. Deal related expenses include Credit Suisse seller advisory fee (not disclosed but assumed to
be equivalent to $12MM JP Morgan buyer advisory fee) and assumed $24MM in financing fees related to Charles River’s $1.2bn credit facility.