Bioenvision climbs, Genzyme holds firms on deal opposition; Guitar Center gains further on sale hopes

By Kenneth Lim

Boston, May 30 - Bioenvision Inc. climbed on Wednesday after a major shareholder said a takeover offer by Genzyme Corp. was too low.

Meanwhile, Genzyme initially fell on the news, but its stock eked out a modest gain in the afternoon on short covering and sentiment that the deal could go through despite opposition.

Guitar Center Inc. continued to improve as brokers said rumors that the company was seeking buyers were possible but not definite.

Bioenvision gains on deal challenge

Bioenvision stock surged past a buyout offer by Genzyme on Wednesday after shareholder SCO Capital Partners LLC said the deal undervalues Bioenvision.

Bioenvision stock (Nasdaq: BIVN) climbed 5.19% or 29 cents to close at $5.88. Genzyme on Tuesday offered $5.60 per Bioenvision share in cash. Bioenvision is a New York-based biopharmaceutical company.

"There were grumblings early on about the offer price, but now a major holder like SCO has stepped in and said the offer isn't enough so investors are hoping that Genzyme will have to raise its offer," a buyside trader said.

SCO Capital wrote a letter to Bioenvision saying that Genzyme's offer "does not adequately reflect the long-term value of Bioenvision's drug pipeline."

"Given that the company just completed a dilutive financing in order to finance the completion of additional clinical trials for Evoltra, this deal seems particularly ill-timed," SCO chairman Steven H. Rouhandeh wrote in the letter. "Additionally, the timing of the sale, potentially just months before an Evoltra approval in adult AML, where Genzyme recently publicly stated 'the drug is showing dramatic complete response rates' seems suboptimal. The company just traded off a 52-week low, so it seems odd that buyout negotiations would be taking place in this time-frame. We currently oppose the deal."

SCO holds a 13.4% stake in Bioenvision and has said it will not vote for the deal or tender its shares.

"I think SCO makes a good point here," the trader said. "If you look at the charts, the stock has been falling for more than a year, but there's expectation of a positive event if Evoltra gets approval. Genzyme's getting away with paying less than a 7% premium over Friday's prices and they'll be reaping whatever gets approved down the line. I didn't think it was that great of a deal for Bioenvision stockholders."

But the trader said the deal could still get passed despite the opposition from SCO.

"I think one of the issues here is that the stock hasn't done that well for more than a year, so some investors may want to just take the money and run elsewhere," the trader said. "The other point is that management and the directors have already approved the deal, and they're holding about 20% of the float, so it could be a pretty even battle."

Genzyme resilient in opposition

Genzyme fell early Wednesday on concern that it may have to pay more for Bioenvision amid opposition to its offer, but the stock finished in positive territory on short covering and improved sentiment.

Genzyme stock (Nasdaq: GENZ) closed at $63.21, up by 1.04% or 65 cents.

"Genzyme took a hit early in the morning but it came back up in the afternoon," an equity trader said. "You could be looking at guys closing out their shorts, taking advantage of the slide from the morning, pushing the stock higher in the afternoon."

Genzyme is a Cambridge, Mass.-based biotech company.

Bioenvision stock holder SCO Capital's opposition to Genzyme's offer raised concerns that Genzyme may have to pay more than it planned, but support from Bioenvision's directors and impatient shareholders may have helped Genzyme stock hold up, the trader said. Genzyme also recently announced plans to buy back $1.5 billion of its common stock over the next three years, the trader noted.

"The fact that the deal could still go through and the stock buyback, these are what's providing a cushion for Genzyme," the trader said.

Guitar Center gain amid sale rumors

Guitar Center continued to rise on Wednesday as brokers said unconfirmed rumors that the company was seeking a seller possibly made sense but were not clear-cut.

Guitar Center stock (Nasdaq: GTRC) rose 1.96% or $1.03 to close at $53.50 on Wednesday.

Rumors emerged on Tuesday that Guitar Center had hired an investment bank to explore a sale of the company, although Guitar Center has not commented on the speculation. Brokers weighed in on Wednesday, saying the company is an attractive buyout target, although it remains unclear whether the company would be interested in a sale.

Goldman Sachs equity analyst Matthew Fassler said Westlake Village, Calif.-based Guitar Center is looking at a profit recovery in 2008 and will likely view a sale only as a "fallback."

"We also believe Guitar Center is optimally positioned for a sale, given its dominant competitive position and capital allocation opportunities, as well as a savvy shareholder base that is likely increasingly weighing in with the board and management, but continue to view this as a fallback strategy," Fassler wrote in a note.

Credit Suisse analyst Gary Balter kept a neutral rating on the stock and said in a note that Guitar Center was "one of our favorites to be LBO'd."

"We continue to believe that Guitar Center's core business under-earns its potential as other high service oriented businesses tend to achieve double digit margins, versus under eight at GTRC," Balter wrote.

But "with the stock at $52.47 we see some potential upside but the risk reward about even, given that there is no confirmation that the company is actually interested in being sold," Balter added.

Balter said a price target of $50 "balances the risk of a transaction not happening with a fair multiple on our revised earnings of $2.63 and $3.15 for the next two years."

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