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NATIONAL HEALTH LABS' $257.6 MIL. CASH AND STOCK OFFER FOR DAMON

This article was originally published in The Gray Sheet

Executive Summary

NATIONAL HEALTH LABS' $257.6 MIL. CASH AND STOCK OFFER FOR DAMON is encountering resistance from certain Damon shareholders. NHL and Damon announced a definitive agreement for Damon's acquisition on June 21. On June 24, Damon reported that some of its stockholders had commenced four class action suits against the firm in Delaware Chancery Court, alleging that by approving the pending acquisition by NHL, the company's directors had "breached their fiduciary duties to Damon stockholders by...failing to adequately consider or solicit other potential acquirers and by taking actions...to thwart a fair and open auction of the company." The complaints also assert the acquisition is "coercive in nature" and that "the merger is grossly unfair and inadequate." Damon responds that the claims are "without merit." NHL is offering to buy 8.9 mil. Damon shares, or approximately 55% of Damon common stock, for $16 per share in cash. The offer will be followed by a tax-free stock swap for the remaining 7.2 mil. shares. Damon shares. "Each remaining share of Damon stock will be exchanged for a number of shares of NHL common stock, equal to $16 divided by the market value of NHL common stock pursuant to the merger, but in no event more than 1.0667 shares, nor less than .8 shares of NHL common stock," NHL says. NHL currently has 88.7 mil. shares outstanding to Damon's 16.1 mil. The offer expires July 20. The offer represents a slight premium over Damon's recent price. On June 18, the last trading day before the merger was announced, Damon's stock closed at 13-7/8. However, the stock has fallen substantially over the last few months; Damon's 1992 year-end price, for example, was 20-3/8. Damon discloses in its solicitation/recommendation statement for the deal, filed June 22 with the Securities and Exchange Commission, that an unnamed potential buyer had expressed interest in a "business combination" with Damon beginning in late spring 1992. The unidentified bidder indicated that "it would engage only in a transaction that was accounted for as a pooling of interests," Damon says, and stipulated that it would not negotiate the price range and terms of the all-cash transaction until August 1993. After evaluation of the two proposed deals, Damon directors voted that NHL's offer was "in the best interest of the shareholders," the company says. The merger of Damon and NHL would create the second largest clinical lab business in the country, behind SmithKline Beecham Clinical Labs. SmithKline established itself as the largest market player in 1988, when it won a bidding war with Metpath parent Corning Glass for International Clinical Laboratories. SmithKline paid $400 mil. for ICL, or approximately twice sales and 83 times earnings. During the same year, Damon successfully fended off an unsolicited takeover bid from an investor group, Nomad Partners. NHL's offer represents .8 times Damon's 1992 sales of $317 mil. and 14 times its $18 mil. in earnings. The Damon transaction, NHL CEO James Maher says, will "both extend the geographic scope of our operation and expand our business with a broad range of health care providers, particularly the growing HMO market." Maher added that the firm will now be able to serve new markets in Boston and San Francisco, as well as augment services in Chicago, Atlanta, Los Angeles, Pittsburgh and Philadelphia, where the company currently offers testing but does not have clinical labs. "We believe this transaction offers our shareholders fair value for their Damon investment," Damon CEO Robert Rosen said. "Joining the strengths of Damon and NHL will give the combined company a significant benefit in the marketplace and enhance our ability to offer high quality service at competitive prices," he added. NHL currently has 15 regional labs and one esoteric lab, while Damon has 13 regional labs in the U.S. and one in Mexico City. Once the merger is completed, some of the labs may be closed, an NHL spokesperson said. NHL reported sales of $721 mil. in 1992 with earnings of $41 mil. Financing for the deal is being provided by Citibank. Morgan Stanley & Co., which is the dealer manager for the offer, is also NHL's financial advisor, while Bear Stearns & Co. is advising Damon.
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