Johnson & Johnson a thorn in Merck deal; Nobel Learning gets cheap bid; sale likely for Charlotte Russe

By Cristal Cody

Tupelo, Miss., March 11 - Merck & Co., Inc.'s $41.1 billion takeover of Schering-Plough Corp. could face a counter bid from Johnson & Johnson, an analyst said Wednesday.

Knowledge Learning Corp.'s second, lower cash offer of $13.50 a share for Nobel Learning Communities, Inc. released on Wednesday is "shameful" but leaves the door open to other bidders, an analyst told Prospect News.

Charlotte Russe Holding, Inc. is expected to sell itself, though the price is likely to be much lower than the offer of $9.00 to $9.50 a share the retailer rejected last year, an analyst said Wednesday.

On Wall Street, stocks continued a two-day advance.

The Dow Jones Industrial Average rose by 3.91 points, or 0.06%, to 6,930.40.

The Standard & Poor's 500 index gained 1.76 points, or 0.24%, to close at 721.36, and the Nasdaq Composite index added 13.36 points, or 0.98%, to close at 1,371.64.

Eyes on Johnson & Johnson

The key risk to Merck's merger with Schering-Plough is a change-of-control clause Schering-Plough has with Johnson & Johnson for the drug Remicade.

Merck and Schering-Plough executives said the deal, structured as a reverse merger with Schering-Plough as the surviving corporation renamed as Merck, does not trigger the clause.

"However, we believe that the transaction structured as a reverse merger could be interpreted as an action not in line with the spirit of the J&J-Merck license agreement," an analyst said. "The change-of-control clause is likely to have been worded to exclude combinations in which Schering-Plough is the surviving corporation to allow for acquisitions of smaller companies by either J&J or Schering-Plough."

Kenilworth, N.J.-based Schering-Plough controls the international marketing rights to the inflammatory treatment drug, and New Brunswick, N.J.-based Johnson & Johnson holds the U.S. marketing rights.

"On this basis we believe that an arbitration court using extrinsic evidence, including correspondence between the two companies on the negotiation of the agreement, could potentially give cause for J&J to challenge the merger," the analyst said.

"We would not rule out a counter bid by J&J for Schering-Plough. In addition, we believe that Schering-Plough would be a good fit for J&J."

Schering-Plough produces prescription medicines, animal health vaccines and consumer health products.

If Schering-Plough accepts a superior offer, the company must pay a $1.25 billion termination fee to Whitehouse Station, N.J.-based Merck, according to the merger agreement filed with the Securities and Exchange Commission.

Under the merger's terms, Schering-Plough shareholders will receive $10.50 in cash and 0.5767 of a Merck share for each Schering-Plough share.

The deal is expected to close in the fourth quarter.

Schering-Plough's stock lost 24 cents, or 1.14%, to close at $20.84, and Merck shares fell 26 cents, or 1.17%, to close at $21.94 on Wednesday.

Johnson & Johnson's stock added 12 cents, or 0.25%, to end trading at $47.90.

Nobel gets cheap trick

Knowledge Learning had tentatively offered about $186 million, or $17.00 a share, on Sept. 22 for Nobel Learning Communities but made the latest proposal for $141.2 million on Tuesday, Nobel said.

George Bernstein, president and chief executive officer of Nobel, said in a statement that the company is dismayed with the latest offer, "especially since we had numerous school tours and meetings with its representatives; we extended at Knowledge Learning Corp.'s request on more than one occasion the time frame for submitting proposals which we had communicated to it and other interested parties; and this is the first we have heard that it was severely reducing its proposed price."

West Chester, Pa.-based Nobel operates more than 180 private preschool, elementary and middle schools in 15 states.

Knowledge Learning of Portland, Ore., operates 1,700 community-based early childhood education and care centers across the country.

"As I look at the long-term fundamentals of the business, it looks like a cheap trick to me," Trace Urdan, an analyst with Signal Hill Group LLC, said of the offer. "Their business has actually been holding up pretty well and I don't think the stock price reflects that."

Nobel shares rose 71 cents, or 6.24%, to close Wednesday at $12.08. The stock has traded from $10.96 to $16.21 over the past year.

Urdan, who favored the $17.00 offer, said in an interview that the board is unlikely to accept the lower share price.

"The challenge in this situation is a lot of the public shareholders tend to trade the stock away to folks that are arbitraging the situation. Those folks like the price because it's still above where the stock has been trading," he said.

The new bid could bring in other suitors, most likely from private equity groups as the population of children under the age of five is set to rise considerably over the next 15 years, Urdan said.

"This gives the board stronger ability to at least try to resist the price," he said. "It also lowers the bar for anyone else that may have been attracted to the situation but wasn't willing to beat the $17.00 price. I had been less sure they could find [another bidder] when the price was $17.00, but this price now borders on shameful."

Charlotte Russe sale in the works

Charlotte Russe's strategic review has ended with a decision to sell the company, according to one analyst.

Although the San Diego-based retailer has made no comment publicly to confirm the sale, "it can be inferred that the outcome of the strategic review is a sale of the company," Amy Noblin, an analyst with Pali Capital Inc., said in a research note on Wednesday. "We do not believe deal books are in circulation yet."

Representatives of Charlotte Russe did not return messages for comment.

Noblin said a fair price for the discount retailer would be $7.50 to $8.00 a share, a 20% premium to Tuesday's closing price.

Still, that's much less than the offer of $9.00 to $9.50 a share from KarpReilly Capital Partners, LP, and H.I.G. Capital LLC that the company rejected in November.

KarpReilly, which last week increased its ownership of Charlotte Russe to 7.63% and nominated three board members to the company, is a "likely bidder," Noblin said.

"We do not see an obvious strategic buyer," she said. "Most candidates are retrenching to manage their core business in this environment and are not looking to be distracted with an acquisition or use any cash outside of core operations."

The main problem with retail mergers and acquisitions in today's market is determining the value of assets on an uncertain sales and earnings outlook this year, she said.

"The real question is what would be an acceptable deal price, with the board having already turned down the previous $9.00-$9.50 a share offer," Noblin said. "We think the most likely candidate, if one exists, would be a financial sponsor."

Shares of Charlotte Russe rose 2 cents, or 0.31%, to close at $6.49 on Wednesday. The stock has traded from $3.98 to $20.34 over the past year.

Mentioned in this article:

Charlotte Russe Holding, Inc. Nasdaq: CHIC

Johnson & Johnson NYSE: JNJ

Merck & Co., Inc. NYSE: MRK

Nobel Learning Communities, Inc. Nasdaq: NLCI

Schering-Plough Corp. NYSE: SGP

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