Interests of Perrigo Management in the
Merger
There are no personal interests of any of
Perrigo’s management in the merger.
Recommendation of the Board of Directors and
the Audit Committee of Agis; Agis’ Reasons for the
Merger
On November 14, 2004, Agis’ board of
directors and audit committee:
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determined that the agreement and plan of merger
and the transactions contemplated by the agreement and plan of
merger are fair to, and in the best interests of, Agis and its
shareholders;
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approved the agreement and plan of merger, the
merger and the other transactions contemplated by the agreement
and plan of merger; and
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resolved to recommend that Agis’
shareholders vote for the approval of the agreement and plan of
merger, the merger and the other transactions contemplated by
the agreement and plan of merger.
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In reaching their decisions to approve the
agreement and plan of merger, the merger and the other
transactions contemplated by the agreement, Agis’ board of
directors and audit committee consulted with Agis management and
Agis’ financial advisors, legal counsel and other
consultants and considered a variety of factors weighing
positively in favor of the merger, including, without
limitation, the following:
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the belief that the merger with Perrigo will
provide Agis with strategic benefits as compared to remaining an
independent company, including:
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greater scale to better compete in the generic
pharmaceutical and active pharmaceutical ingredients markets,
especially in the U.S.;
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the potential for Agis to leverage its product
portfolio through Perrigo’s existing infrastructure,
distribution channels and customer and strategic relationships;
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the ability of Agis to leverage Perrigo’s
capabilities to grow its over-the-counter (OTC) franchise;
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the potential for Agis to benefit from
Perrigo’s highly efficient manufacturing infrastructure and
supply chain to improve its gross margins;
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the potential for Agis to benefit from
Perrigo’s greater corporate resources and access to
capital; and
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the potential to increase Agis’
competitiveness through synergies and internal economies of
scale.
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the value of the merger consideration to be
received by Agis shareholders in the merger, which represented a
premium of approximately 21.4% over NIS 109.00, the closing
price per Agis ordinary share as reported on the Tel-Aviv Stock
Exchange on November 14, 2004, and a premium of 31.1% over
Agis’ average price over the 30 days ended
November 4, 2004;
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the fact that Agis’ shareholders will
receive a significant portion of the merger consideration in
cash, thereby providing immediate liquidity to Agis
shareholders, and the remainder in Perrigo stock, thereby
allowing Agis shareholders to participate in the benefits of a
more diversified company with greater resources and, as
shareholders of Perrigo, to benefit from any future growth of
the combined company;
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the opinion of Agis’ financial advisor,
Merrill Lynch & Co., that as of November 14, 2004,
and on the basis of and subject to the facts and assumptions set
forth in the opinion, the consideration to be received by the
holders of Agis ordinary shares pursuant to the transaction,
taken as a whole, was fair from a financial point of view to
such shareholders, as more fully described below under
“Opinion of Merrill Lynch & Co.” on
page 60;
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Agis’ business, financial performance and
condition, strategic objectives and prospects, both on a
stand-alone basis and as part of the combined company after
giving effect to the merger with
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Perrigo, which were viewed in light of the
alternative practicable courses of action available to Agis and
current industry, economic and market conditions, including
increasing competition in the generic pharmaceutical and API
industries;
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the fact that the Perrigo merger would reduce
geopolitical risk to Agis shareholders due to the increased
geographical diversity of the combined company;
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the fact that Agis’ management and employees
would play a key role in the combined company;
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the fact that owning shares of the combined
company would provide an opportunity for greater liquidity to
Agis’ shareholders and that those shares would be listed on
the Tel-Aviv Stock Exchange and the Nasdaq National Market;
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the belief that Perrigo is able to finance the
cash portion of the merger consideration;
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the ability of Agis to provide information to and
enter into negotiations with third parties that have made an
acquisition proposal, and, in certain circumstances, to
terminate the agreement and plan of merger to accept a superior
proposal after payment of a termination fee;
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the ability of Agis’ board of directors to
change its recommendation to shareholders if it concludes in
good faith that the failure to do so would result in a breach of
its fiduciary duties to Agis’ shareholders;
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the fact that Moshe Arkin, Agis’ largest
shareholder, supported the merger with Perrigo and has committed
to vote all of his shares in favor of the merger with Perrigo;
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the belief that the terms and conditions of the
agreement and plan of merger and related agreements are
reasonable; and
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the determination that, considering the financial
position of the merging companies, no reasonable concern exists
that Agis, as the surviving corporation in the merger, will be
unable to fulfill the obligations of Agis to its creditors.
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In addition, the Agis board of directors and
audit committee also identified and considered a variety of
potentially negative factors in its deliberations concerning the
merger, including:
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the possibility of a decrease in the trading
price of Perrigo’s common stock between the date of the
execution of the agreement and plan of merger and the completion
of the merger which would lessen the value of the fixed number
of shares of Perrigo’s common stock that constitutes the
stock portion of the merger consideration, and that the
agreement and plan of merger does not provide Agis with a
price-based collar or termination right for Agis or its
shareholders;
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the possibility that certain provisions of the
agreement and plan of merger, including the non-solicitation,
termination rights and termination fee and other protective
provisions, might have the effect of discouraging other persons
potentially interested in acquiring Agis from pursuing such an
opportunity;
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the terms of the agreement and plan of merger
that restrict the conduct of Agis’ business during the
period between the signing of the agreement and plan of merger
and the completion of the merger;
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the potential impact of the proposed merger on
Agis’ relationship with its business partners and
employees; and
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the risks described in the section entitled
“Risk Factors Relating to the Merger” on page 13.
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The Agis board of directors also considered the
personal interest of certain directors and officers of Agis in
the transaction, as more fully described in “Interests of
Agis Management in the Merger” on page 68, which the
Agis board of directors considered as being neutral in its
evaluation of the proposed transaction.
59
The above discussion of the information and
factors considered by the board of directors and audit committee
of Agis is not intended to be exhaustive. In view of the variety
of factors considered and qualitative judgments made with
respect to such factors in connection with its evaluation of the
proposed merger, the board of directors did not find it
practicable to quantify, analyze or assign relative weights to
each individual factor to reach its determination. Individual
members of Agis’ board of directors and audit committee may
have assigned different relative weights or conclusions to each
factor affecting the board’s determination.
The Agis board of directors and audit committee
believe that the transactions contemplated by the agreement and
plan of merger are fair to and in the best interests of Agis and
the holders of Agis ordinary shares.
Opinion of Merrill Lynch &
Co.
Agis retained Merrill Lynch to act as its
financial advisor with respect to the proposed transaction. In
connection with that engagement, Agis requested that Merrill
Lynch evaluate the fairness, from a financial point of view, of
the consideration to be received by the holders of Agis ordinary
shares pursuant to the agreement and plan of merger. At the
meeting of the Agis board of directors on November 14,
2004, Merrill Lynch rendered its oral opinion to the Agis board
of directors, which opinion was subsequently confirmed in
writing, that as of November 14, 2004, based upon the
assumptions made, matters considered and limits of such review,
as set forth in its opinion, the merger consideration to be
received by the holders of Agis ordinary shares, taken as a
whole, was fair from a financial point of view to such holders.
The full text of Merrill Lynch’s written
opinion, which sets forth material information relating to
Merrill Lynch’s fairness opinion, including the assumptions
made, matters considered and qualifications and limitations on
the scope of review undertaken by Merrill Lynch, is attached as
APPENDIX C
and is incorporated into this document by
reference in its entirety. This description of Merrill
Lynch’s opinion is qualified in its entirety by reference
to, and should be reviewed together with, the full text of the
opinion. You are urged to read the opinion and consider it
carefully.
Merrill Lynch’s opinion is addressed to the
Agis board of directors and addresses only the fairness, from a
financial point of view, of the merger consideration to be
received by holders of Agis ordinary shares, taken as a whole,
as of the date of the opinion. The terms of the proposed
transaction, including the merger consideration to be received
by holders of Agis ordinary shares, were determined through
negotiations between Agis and Perrigo and were not determined or
recommended by Merrill Lynch. Merrill Lynch’s opinion does
not address the merits of the underlying decision by Agis or its
principal shareholder to engage in the proposed transaction, nor
does it constitute, nor should it be construed as, a
recommendation to any shareholder of Agis or Perrigo as to how
to vote on any matter related to the proposed transaction.
In arriving at its opinion, Merrill Lynch, among
other things:
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reviewed certain publicly available business and
financial information relating to Agis and Perrigo that Merrill
Lynch deemed to be relevant;
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reviewed certain information, including financial
forecasts, relating to the business, earnings, cash flow,
assets, liabilities and prospects of Agis and Perrigo furnished
to Merrill Lynch by Agis and Perrigo, respectively;
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conducted discussions with members of senior
management and representatives of Agis and Perrigo concerning
the matters described in the preceding two bullet points, as
well as their respective businesses and prospects before and
after giving effect to the merger;
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reviewed the market prices and valuation
multiples for Agis ordinary shares and shares of Perrigo common
stock and compared them with those of certain publicly traded
companies that Merrill Lynch deemed to be relevant;
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reviewed the results of operations of each of
Agis and Perrigo and compared them with those of certain
publicly traded companies that Merrill Lynch deemed to be
relevant;
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compared the proposed financial terms of the
merger with the financial terms of certain other transactions
that Merrill Lynch deemed to be relevant;
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participated in certain discussions and
negotiations among representatives of Agis and Perrigo and their
financial and legal advisors;
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reviewed the potential pro forma impact of the
merger;
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reviewed the agreement and plan of merger and
other related agreements, each dated as of November 14,
2004, and certain related documents; and
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reviewed such other financial studies and
analyses and took into account such other matters as Merrill
Lynch deemed necessary, including Merrill Lynch’s
assessment of general economic, market and monetary conditions.
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In preparing its opinion, Merrill Lynch assumed
and relied on the accuracy and completeness of all information
supplied or otherwise made available to it, discussed with or
reviewed by or for it, or publicly available, and Merrill Lynch
did not assume any responsibility for independently verifying
such information or undertake an independent evaluation or
appraisal of any of the assets or liabilities of Agis or Perrigo
nor was Merrill Lynch furnished with any such evaluation or
appraisal, and Merrill Lynch did not evaluate the solvency or
fair value of Agis or Perrigo under any foreign, state or
federal laws relating to bankruptcy, insolvency or similar
matters. In addition, Merrill Lynch did not assume any
obligation to conduct any physical inspection of the properties
or facilities of Agis or Perrigo. With respect to the financial
forecast information furnished to or discussed with Merrill
Lynch by Agis or Perrigo, Merrill Lynch assumed that such
financial forecast information was reasonably prepared and
reflected the best currently available estimates and judgment of
Agis management and Perrigo management as to the expected future
financial performance of Agis or Perrigo, as applicable. Merrill
Lynch assumed that the representations and warranties of each
party contained in the agreement and plan of merger were true
and correct as of the date of the agreement and plan of merger,
that each party will perform all of its respective covenants and
agreements contained in the agreement and plan of merger and
that the proposed transaction will be consummated in accordance
with the terms of the agreement and plan of merger without
waiver, modification or amendment. Merrill Lynch did not render
any accounting, legal or tax advice and Merrill Lynch understood
that Agis is relying upon its own accounting, legal and tax
advisors as to accounting, legal and tax matters in connection
with the proposed transaction.
Merrill Lynch’s opinion was necessarily
based upon market, economic and other conditions as they existed
and could be evaluated on the date of the opinion, and upon the
information made available to Merrill Lynch as of the date of
the opinion. Merrill Lynch assumed that in the course of
obtaining the necessary regulatory or other consents or
approvals (contractual or otherwise) for the merger, no
restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a
material adverse effect on the contemplated benefits of the
merger.
Merrill Lynch has no obligation to update its
opinion to take into account events occurring after the date
that its opinion was delivered to the Agis board of directors.
Circumstances could develop prior to consummation of the
proposed transaction that, if known at the time Merrill Lynch
rendered its opinion, would have altered its opinion. In
addition, Merrill Lynch was not asked to address, and its
opinion does not address, the fairness to, or any other
consideration of, the holders of any class of securities,
creditors or other constituencies of Agis, other than the
holders of Agis ordinary shares, nor does Merrill Lynch’s
opinion address in any manner the terms of the Undertaking
Agreement, the Lock-Up Agreement, the Nominating Agreement, the
Registration Rights Agreement (as defined in the section
entitled “Other Agreements” on page 102) or any
other agreement between Mr. Arkin and Perrigo. Merrill
Lynch has expressed no opinion as to the prices at which Agis
ordinary shares or shares of Perrigo common stock will trade, or
the trading volume of Agis ordinary shares or shares of Perrigo
common stock on any stock exchange or trading market on which
such securities may be listed or admitted to trading, following
the
61
announcement or consummation of the proposed
transaction. In addition, as described above, Merrill
Lynch’s fairness opinion was among several factors taken
into consideration by the Agis board of directors in making its
determination to approve the agreement and plan of merger and
the proposed transaction. Consequently, Merrill Lynch’s
analyses described below should not be viewed as determinative
of the decision of the Agis board of directors to approve the
proposed transaction or to recommend the proposed transaction to
Agis shareholders.
The matters considered by Merrill Lynch in
arriving at its opinion are based on numerous macroeconomic,
operating and financial assumptions with respect to industry
performance, general business and economic conditions, many of
which are beyond the control of Agis or Perrigo, and involve the
application of complex methodologies and educated judgment. Any
estimates incorporated in the analyses performed by Merrill
Lynch are not necessarily indicative of actual past or future
results or values, which may be significantly more or less
favorable than these estimates. Estimated values do not purport
to be appraisals and do not necessarily reflect the prices at
which businesses or companies may be sold in the future.
Certain of the following summaries of financial
analyses include information presented in tabular format. In
order to understand fully the financial analyses used by Merrill
Lynch, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete
description of the financial analyses. Considering the data set
forth in the tables without considering the full narrative
description of the financial analyses, including the
methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of the financial analyses
performed by Merrill Lynch.
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Merrill Lynch’s Financial
Analyses
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In accordance with customary investment banking
practice, Merrill Lynch employed commonly used valuation methods
in connection with the delivery of its opinion. The following is
a description of the material financial analyses performed by
Merrill Lynch in connection with its opinion. All Agis ordinary
share price and financial information has been converted to
U.S. dollars at an exchange rate of US$1.00:NIS4.4250, with
the exception of average Agis ordinary share price information,
which has been calculated using Agis ordinary share prices
converted to U.S. dollars at daily U.S. dollar/
Israeli shekel exchange rates.
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Merger Consideration to be Received by
Holders of Agis Ordinary Shares
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Merrill Lynch reviewed the terms of the agreement
and plan of merger. Merrill Lynch noted that the merger
consideration to be received by Agis shareholders in the form of
$14.93 of cash and 0.8011 shares of Perrigo common stock
for each ordinary share of Agis has an implied offer value of
$29.87 per share based upon the closing price of
Perrigo’s stock on November 12, 2004.
Implied Premium
Analysis.
Merrill Lynch reviewed the
historical closing prices of Agis ordinary shares on
November 4, 2004 and the closing prices and period averages
at various points in time prior to November 4, 2004.
Subsequent to the close of the financial markets on
November 4, 2004, several news stories appeared reporting
that Agis was in negotiations to be acquired. The following
table reflects the premium over the closing price and average
closing prices per ordinary share of Agis for the specified
periods implied by the implied value of the merger consideration
of $29.87 per share:
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Implied
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Date or Period
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Price
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Premium
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November 4, 2004
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$
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23.00
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29.9
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%
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1 week average (prior to and including
November 4, 2004)
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$
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22.45
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33.1
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%
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30-day average (prior to and including
November 4, 2004)
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$
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22.78
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31.1
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%
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Implied Multiple
Analysis.
Based on the implied value
of the merger consideration, Merrill Lynch calculated an implied
offer value of $818 million, based on the total number of
Agis fully diluted shares outstanding, and an implied
transaction value of $852 million, calculated as implied
offer value plus net
62
debt. Merrill Lynch also analyzed the implied
transaction value as a multiple of the estimated 2004 and 2005
revenue, the estimated 2004 and 2005 earnings before interest,
taxes, depreciation and amortization, which is referred to as
“EBITDA,” and the estimated 2004, 2005 and 2006 price
to earnings ratio, which is referred to as “P/E.” All
estimated financial data was based on Merrill Lynch estimates
and independent research analyst estimates. This analysis
indicated the following multiples:
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Implied
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Financial Measure
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Value
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Multiple
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2004E Revenue
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$418 million
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2.04x
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2005E Revenue
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$460 million
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1.85x
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2004E EBITDA
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$ 65 million
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13.0x
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2005E EBITDA
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$ 69 million
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12.4x
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2004E P/E
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$1.41
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21.2x
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2005E P/E
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$1.69
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17.7x
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2006E P/E
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$2.03
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14.7x
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Historical Stock Trading
Analysis.
Merrill Lynch reviewed the
historical trading performance of Agis ordinary shares as
reported by FactSet. FactSet is an online investment research
and database service used by financial institutions. Merrill
Lynch observed that the closing low and high trading prices for
ordinary shares of Agis over the twelve month period ending on
November 12, 2004 were $20.69 and $33.96, respectively.
Merrill Lynch compared this range of historical share prices to
the implied value of the merger consideration to be received by
holders of Agis ordinary shares, $29.87 per share.
Research Analyst Stock Price
Targets.
Merrill Lynch reviewed four
recent publicly available research analyst reports for Agis and
observed that the range of the research analyst share price
targets was $29.38 to $32.77. Merrill Lynch compared this range
to the implied value of the merger consideration to be received
by holders of Agis ordinary shares, $29.87 per share.
Premiums Paid
Analysis.
Merrill Lynch reviewed
premiums to stock price paid in six generic pharmaceutical
acquisitions, which it judged to be reasonably comparable to the
merger. The precedent transactions that Merrill Lynch considered
for this analysis were:
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Acquiror
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Target
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IVAX Corporation
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Kutnowskie Zaklady Farmaceutyczne
“POLFA” S.A. (“Polfa Kutno”)
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Teva Pharmaceutical Industries Limited
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SICOR Inc.
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Novartis AG
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Lek Pharmaceutical & Chemical
Company d.d.
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Barr Laboratories, Inc.
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Duramed Pharmaceuticals, Inc.
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IVAX Corporation
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Laboratorio Chile S.A.
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Teva Pharmaceutical Industries Limited
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Copley Pharmaceutical, Inc.
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Merrill Lynch reviewed the premiums paid in these
transactions over the price of the target stock as reported by
FactSet at various dates before and on the approximate date on
which the public became aware of the possibility of such
transactions. Based on this analysis, Merrill Lynch observed a
range of premiums of 9.9% to 23.9% over the market price of the
target stock one day prior to the approximate date on which the
public became aware of the possibility of such transactions.
Merrill Lynch applied a 15% to 25% range of premiums to the
November 4, 2004 closing share price for an ordinary share
of Agis of $23.00 and calculated an implied range of Agis share
prices of $26.45 to $28.75 per share. Merrill
63
Lynch compared this range of implied share prices
to the $29.87 per share implied value of the merger
consideration to be received by holders of Agis ordinary shares.
Comparable Public Trading Multiples
Analysis.
Merrill Lynch compared
selected financial and trading data of Agis with similar data
for thirteen publicly traded generic pharmaceutical companies
which Merrill Lynch judged to be reasonably comparable to Agis.
These companies were:
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Teva Pharmaceutical Industries Limited
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Mylan Laboratories Inc.
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Barr Laboratories, Inc.
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IVAX Corporation
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Watson Pharmaceuticals, Inc.
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American Pharmaceutical Partners, Inc.
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Eon Labs, Inc.
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Andrx Corporation
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Par Pharmaceutical Companies, Inc.
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K-V Pharmaceutical Company
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Alpharma Inc.
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Impax Laboratories, Inc.
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Taro Pharmaceutical Industries Limited
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For each of the comparable companies, Merrill
Lynch determined various valuation multiples, including the
ratio of market capitalization to revenue, the ratio of market
capitalization to EBITDA, and the ratio of share price to
earnings per share, which we refer to as “EPS.” To
calculate these trading multiples, Merrill Lynch used EBITDA
projections reported by independent research analyst reports and
EPS estimates reported by First Call, a subsidiary of Thomson
Financial. First Call is a data service that monitors and
publishes compilations of earnings estimates by selected
research analysts regarding companies of interest to
institutional investors.
Merrill Lynch observed the multiples of share
price to estimated 2005 EPS of the comparable companies and
derived a range of such multiples of 14.0x to 16.0x. Merrill
Lynch applied this range of multiples to the estimated 2005 EPS
of Agis as estimated (i) based on independent research
analyst estimates and (ii) by Agis management. Based on
this analysis, Merrill Lynch calculated ranges of implied share
prices of $23.63 to $27.00 per share based on the research
analysts’ estimates and of $26.24 to $29.99 per share
based on the Agis management estimates. Merrill Lynch compared
these ranges of implied share prices to the $29.87 per
share implied value of the merger consideration to be received
by holders of Agis ordinary shares.
No company used in the above analysis is
identical to Agis. In evaluating companies identified by Merrill
Lynch as comparable to Agis, Merrill Lynch made judgments and
assumptions with regard to industry performance, general
business, economic, market and financial conditions and other
matters, many of which are beyond the control of Agis, such as
the impact of competition on the business of Agis and the
industry generally, industry growth and the absence of any
material change in the financial condition and prospects of Agis
or the industry or in the financial markets in general. A
complete analysis involves complex considerations and judgments
concerning differences in financial and operating
characteristics of the comparable companies and other factors
that could affect the public trading values of such comparable
companies to which Agis is being compared; mathematical analysis
is not in itself a meaningful method of using selected company
data.
64
Comparable Transaction
Analysis.
Using publicly available
research analyst estimates and other publicly available
information, Merrill Lynch examined the following transactions
in the generic pharmaceutical industry which Merrill Lynch
deemed to be relevant. The precedent transactions that Merrill
Lynch considered comparable are:
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Acquiror
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Target
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IVAX Corporation
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Kutnowskie Zaklady Farmaceutyczne
“POLFA” S.A. (“Polfa Kutno”)
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Teva Pharmaceutical Industries Limited
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SICOR Inc.
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Novartis AG
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Lek Pharmaceutical & Chemical Company
d.d.
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Alpharma
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F H Faulding and Co. Ltd. (Purepac)
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Barr Laboratories, Inc.
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Duramed Pharmaceuticals, Inc.
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IVAX Corporation
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Laboratorio Chile S.A.
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Teva Pharmaceutical Industries Limited
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Novopharm Ltd.
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Teva Pharmaceutical Industries Limited
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Copley Pharmaceutical, Inc.
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Teva Pharmaceutical Industries Limited
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Pharmachemie B.V.
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Merrill Lynch calculated the price per share paid
for target companies as a multiple of EPS for the twelve month
period following the date of the announcement of the
transactions and derived a range of multiples of 15.0x to 18.0x.
Merrill Lynch applied this range of multiples to the estimated
2005 EPS of Agis as estimated (i) based on independent
research analyst estimates and (ii) by Agis management.
Based on this analysis, Merrill Lynch calculated ranges of
implied share prices of $25.32 to $30.38 per share based on
the research analysts’ estimates and of $28.12 to
$33.74 per share based on the Agis management estimates.
Merrill Lynch compared these ranges of implied share prices to
the $29.87 per share implied value of the merger
consideration to be received by holders of Agis ordinary shares.
All calculations of multiples paid in the
selected transactions were based on public information available
at the time of public announcement. Merrill Lynch’s
analysis did not take into account different market and other
conditions during the period in which the selected transactions
occurred.
No transaction utilized in the analysis above is
identical to the proposed transaction. A complete analysis
involves complex considerations and judgments concerning
differences in financial and operating characteristics of the
companies involved in these transactions and other factors that
could affect the transaction multiples or premiums paid in such
comparable transactions to which the proposed transaction is
being compared; mathematical analysis (such as determining the
mean or the median) is not in itself a meaningful method of
using selected transaction data.
Discounted Cash Flow
Analysis.
Merrill Lynch performed a
discounted cash flow analysis for Agis on a standalone basis
(i) based on independent research analyst estimates for
Agis, and (ii) based on projections provided by Agis
management. In each case, Merrill Lynch calculated ranges of
equity values per share for Agis based upon the sum of the
discounted net present value of Agis’ five year stream of
projected unlevered free cash flows plus the discounted net
present value of the terminal value based on a range of
multiples applied to its projected 2009 EBITDA, less the net
debt of Agis as of September 30, 2004.
Using discount rates ranging from 11.0% to 13.0%
and terminal value multiples of estimated 2009 EBITDA ranging
from 7.5x to 9.5x, Merrill Lynch calculated the following ranges
of implied equity value per ordinary share of Agis:
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Low
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High
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Implied equity value per Agis share —
based on research analyst estimates
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$
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18.68
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$
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25.24
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Implied equity value per Agis share —
based on Agis management estimates
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$
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25.24
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$
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33.14
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65
Merrill Lynch compared the ranges of implied
equity value per ordinary share of Agis to the $29.87 per
share implied value of the merger consideration to be received
by holders of Agis ordinary shares.
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Perrigo Valuation Analyses
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Historical Stock Trading
Analysis.
Merrill Lynch reviewed the
historical trading performance of shares of Perrigo common stock
as reported by FactSet. Merrill Lynch observed that the closing
low and high trading prices for shares of Perrigo common stock
over the twelve month period ending on November 12, 2004
were $13.50 and $24.96, respectively. Merrill Lynch compared
this range of historical stock prices to the November 12,
2004 closing share price for Perrigo common stock of $18.65.
Research Analyst Stock Price
Targets.
Merrill Lynch reviewed five
recent publicly available research analyst reports for Perrigo
and observed that the range of the research analyst stock price
targets was $20.00 to $26.00 per share of Perrigo common
stock. Merrill Lynch compared this range to the
November 12, 2004 closing price for a share of Perrigo
common stock of $18.65.
Comparable Public Trading Multiples
Analysis.
Merrill Lynch compared
selected financial and trading data of Perrigo with similar data
for nine publicly traded mid cap consumer products companies
which Merrill Lynch judged to be reasonably comparable to
Perrigo. These companies were:
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The Alberto-Culver Company
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•
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NBTY Inc.
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•
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Church & Dwight Co., Inc.
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•
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Cott Corporation
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•
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Nu Skin Enterprises, Inc.
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•
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Ralcorp Holdings, Inc.
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•
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Chattem, Inc.
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•
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Elizabeth Arden, Inc.
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•
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USANA Health Sciences Inc.
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For each of the comparable companies, Merrill
Lynch determined various valuation multiples, including the
ratio of market capitalization to revenue, the ratio of market
capitalization to EBITDA, and the ratio of share price to EPS.
To calculate these trading multiples, Merrill Lynch used EBITDA
projections reported by independent research analyst reports and
EPS estimates reported by First Call.
Merrill Lynch observed the multiples of share
price to estimated 2005 EPS of the comparable companies and
derived a range of such multiples of 15.0x to 18.0x. Merrill
Lynch applied this range of multiples to the estimated calendar
year 2005 EPS of Perrigo as estimated (i) based on
independent research analyst estimates and (ii) by Perrigo
management. Based on this analysis, Merrill Lynch calculated
ranges of implied share prices of $16.13 to $19.35 per
share based on the research analysts’ estimates and of
$16.39 to $19.67 per share based on the Perrigo management
estimates. Merrill Lynch compared each of these ranges of
implied share prices to the November 12, 2004 closing share
price of Perrigo common stock of $18.65.
No company used in the above analysis is
identical to Perrigo. In evaluating companies identified by
Merrill Lynch as comparable to Perrigo, Merrill Lynch made
judgments and assumptions with regard to industry performance,
general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Perrigo,
such as the impact of competition on the business of Perrigo and
the industry generally, industry growth and the absence of any
material change in the financial condition and prospects of
Perrigo or the industry or in the financial markets in general.
A complete analysis involves complex considerations and
judgments concerning differences in financial and operating
66
characteristics of the comparable companies and
other factors that could affect the public trading values of
such comparable companies to which Perrigo is being compared;
mathematical analysis is not in itself a meaningful method of
using selected company data.
Discounted Cash Flow
Analysis.
Merrill Lynch performed a
discounted cash flow analysis for Perrigo on a stand-alone basis
(i) based on independent research analyst estimates for
Perrigo, and (ii) based on projections provided by Perrigo
management. Merrill Lynch calculated ranges of equity values per
share for Perrigo based upon the sum of the discounted net
present value of Perrigo’s five year stream of projected
unlevered free cash flows plus the discounted net present value
of the terminal value based on a range of multiples of its
projected 2009 EBITDA, less the net debt of Perrigo as of
September 25, 2004.
Using discount rates ranging from 8.0% to 10.0%
and terminal value multiples of estimated 2009 EBITDA ranging
from 8.0x to 10.0x, Merrill Lynch calculated the following
ranges of implied equity value per share of Perrigo common stock:
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Low
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High
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Implied equity value per Perrigo
share — based on research analyst estimates
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$
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19.04
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$
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23.85
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Implied equity value per Perrigo
share — based on Perrigo management estimates
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$
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22.12
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$
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27.97
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Pro Forma Combination
Analyses
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Pro Forma EPS Accretion/ (Dilution)
Analysis.
Merrill Lynch performed a
pro forma analysis of the expected financial impact of the
proposed transaction on Perrigo’s estimated GAAP EPS and
cash EPS (as defined below) for fiscal years 2006 and 2007. The
pro forma results were calculated as if the proposed transaction
had closed on June 30, 2005 and the EPS estimates were
estimated based on (i) publicly available EPS estimates
provided by First Call and (ii) EPS estimates provided by
Agis and Perrigo management. The Agis EPS estimates were
adjusted to reflect U.S. GAAP based on Agis management
estimates for goodwill amortization. Estimated cash EPS was
calculated as estimated GAAP EPS excluding adjustments for any
new amortization arising from the purchase price allocation, and
both GAAP EPS and cash EPS excluded merger and
restructuring-related expenses and synergies.
This analysis indicated that, based on First Call
estimates, the proposed transaction would be neutral to
Perrigo’s estimated GAAP EPS in fiscal year 2006 and would
be accretive to Perrigo’s estimated GAAP EPS in fiscal year
2007 and Perrigo’s estimated cash EPS in fiscal years 2006
and 2007. Based on internal management estimates, the analysis
indicated that the proposed merger would be accretive to
Perrigo’s estimated GAAP EPS and estimated cash EPS in
fiscal years 2006 and 2007.
The actual results achieved by Perrigo after
consummation of the proposed transaction may vary from the
estimated results and the variations may be material. The
summary set forth above does not purport to be a complete
description of the analyses performed by Merrill Lynch in
arriving at its opinion. The preparation of a fairness opinion
is a complex process involving various determinations as to the
most appropriate and relevant methods of financial analysis and
the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. No company, business or
transaction used in such analyses as a comparison is identical
to Agis or Perrigo or the proposed transaction, nor is an
evaluation of such analyses entirely mathematical. In arriving
at its opinion, Merrill Lynch did not attribute any particular
weight to any analysis or factor considered by it, but rather
made qualitative judgments as to the significance and relevance
of each analysis and factor. Accordingly, Merrill Lynch believes
that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered
by it, without considering all factors and analyses, would, in
the view of Merrill Lynch, create an incomplete and misleading
view of the analyses underlying Merrill Lynch’s opinion.
67
Agis retained Merrill Lynch based upon Merrill
Lynch’s experience and expertise. Merrill Lynch is an
internationally recognized investment banking firm with
substantial experience in transactions similar to the proposed
transaction. Merrill Lynch, as part of its investment banking
business, is continually engaged in the valuation of businesses
and securities in connection with business combinations and
acquisitions and for other purposes.
Under the terms of the engagement letter between
Merrill Lynch and Agis, Merrill Lynch provided financial
advisory services and the financial fairness opinion in
connection with the proposed transaction, and Agis agreed to pay
a fee to Merrill Lynch equal to 0.50% of the aggregate purchase
price in connection with the proposed transaction, which is
contingent and payable upon the closing of the proposed
transaction. “Purchase Price” means an amount equal to
of the sum of:
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the aggregate fair market value of the securities
issued by Perrigo to Agis or its shareholders; and
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•
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any cash consideration paid to Agis or its
shareholders (including, without limitation, holders of options,
warrants, convertible securities and preferred securities) in
connection with the proposed transaction.
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Agis has also agreed to reimburse Merrill Lynch
for its reasonable expenses incurred in performing its services
in an amount up to $200,000. In addition, Agis has agreed to
indemnify Merrill Lynch and its affiliates, their respective
directors, officers, agents, employees and controlling persons
against certain liabilities and expenses, including certain
liabilities under the federal securities laws, related to or
arising out of Merrill Lynch’s engagement.
Merrill Lynch has, in the past, provided
financial advisory and financing services to Agis and/or its
affiliates and may continue to do so, and has received, and may
receive, fees for the rendering of such services. In addition,
in the ordinary course of its business, Merrill Lynch may
actively trade in the securities of Agis or Perrigo for its own
account and for the accounts of its customers and, accordingly,
may at any time hold a long or short position in those
securities.
Interests of Agis Management in the
Merger
Some of the Agis directors and executive
officers, as well as several other members of Agis senior
management, may have a personal interest in the merger, the
agreement and plan of merger and the transactions contemplated
thereby that is different from, or in addition to, the interests
of Agis shareholders generally which may have influenced their
decision to support or recommend the merger. The Agis board of
directors and audit committee were aware of these interests and
considered them, among other matters, in approving the agreement
and plan of merger and the merger.
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Agreements with Moshe Arkin
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Moshe Arkin, Agis’ Chairman and President
and largest shareholder, will receive in the merger
approximately $186 million and approximately
10 million shares of Perrigo common stock in consideration
for his Agis shares, expected to represent approximately 10.5%
of Perrigo’s outstanding shares upon completion of the
merger (based on the number of outstanding shares as of
December 17, 2004).
Moshe Arkin has been the principal shareholder
and Chairman of the Board of Directors of Agis since its
establishment in 1983 (and prior to that, of its affiliated
companies). He also served as Agis’ Chief Executive Officer
from its establishment through December 2000 and from that date
to the present as its President. Mr. Arkin holds a degree
in psychology from the Tel-Aviv University. Mr. Arkin is
52 years of age and resides in Israel.
In connection with the agreement and plan of
merger, Mr. Arkin has entered on November 14, 2004,
into an Undertaking Agreement, a copy of which is attached as
APPENDIX D
to this proxy statement/ prospectus and which
is incorporated herein by reference, a Lock-Up Agreement, a copy
of which is attached as
APPENDIX G
to this proxy
statement/ prospectus and which is incorporated herein by
reference, Registration Rights Agreement, a copy of which is
attached as
APPENDIX H
to this proxy
68
statement/ prospectus and which is incorporated
herein by reference, and Nominating Agreement, a copy of which
is attached as
APPENDIX F
to this proxy statement/
prospectus and which is incorporated herein by reference, with
Perrigo. Mr. Arkin has also entered into an Employment
Agreement with Agis and Perrigo, a copy of which is attached as
APPENDIX I
to this proxy statement/ prospectus and which
is incorporated herein by reference. This agreement will become
effective upon completion of the merger and replace
Mr. Arkin’s existing employment agreement with Agis.
The provisions of these agreements are complicated and not
easily summarized. We urge you to read these documents carefully.
Pursuant to the terms of the Undertaking
Agreement, Mr. Arkin agreed to vote the Agis shares
beneficially owned by him, representing approximately 45.7% of
the outstanding ordinary shares of Agis (based on the
27,393,705 shares outstanding as of December 17, 2004
which excludes shares held in treasury and shares held by
Agis’ subsidiaries) in favor of the transaction.
Mr. Arkin has also agreed to vote his shares against any
action or agreement that would reasonably be expected to result
in a breach of any of Agis’ representations, warranties,
covenants or obligations in the agreement and plan of merger,
any extraordinary corporate transactions (other than the merger
with Perrigo), any amendments to Agis’ articles of
association or memorandum of association, if such amendment
would reasonably be expected to impair or delay Agis’
ability to consummate the merger with Perrigo, or any other
action that is intended to, or would reasonably be expected to,
interfere with, impede, delay, postpone, or adversely effect the
merger with Perrigo.
Except under limited circumstances,
Mr. Arkin may not dispose of any of those shares between
November 14, 2004 and the effective time of the merger or
the termination of the agreement and plan of merger.
Mr. Arkin was not paid additional consideration in
connection with his execution of the Undertaking Agreement.
Pursuant to the terms of the Lock-up Agreement,
Mr. Arkin agreed that he will not, directly or indirectly,
dispose of any shares of Perrigo common stock received by him in
consideration for his Agis shares in the merger for two years
following the consummation of the merger. For a period
commencing on the second anniversary of the merger and ending on
the third anniversary of the merger, Mr. Arkin agreed to
make no disposition of more than 50% of the shares of Perrigo
common stock received by him in the merger. The restrictions on
dispositions set forth above shall not apply to dispositions to
a family member, trust or other entity made solely for estate or
tax planning purposes (provided that any such transferee will
agree to be bound by the Lock-up Agreement). If
Mr. Arkin’s employment with Agis is terminated under
certain circumstances, Mr. Arkin will have the right to
terminate the Lock-up Agreement upon the earlier of (a) the
two year anniversary of the merger or (b) the six month
anniversary of such termination of employment. The Lock-up
Agreement will not become effective until the completion of the
merger.
Pursuant to the terms of the Registration Rights
Agreement, beginning 120 days before the second anniversary
of the merger (or, if earlier, upon the termination of the
Lock-up Agreement), Mr. Arkin will have the right to demand
registration of the shares of Perrigo common stock he received
in the merger once a year for three years (subject to minimum
sale requirement of 2,000,000 shares under each such
registration). In addition, beginning two years after the
completion of the merger, Mr. Arkin will have the right to
participate in any other registrations of shares of Perrigo
common stock made by Perrigo (except in the event the Lock-up
Agreement was terminated).
Under the Registration Rights Agreement, in each
registration of his shares of Perrigo common stock
Mr. Arkin will bear Perrigo’s and his registration
expenses, including the fees of Perrigo’s legal counsel up
to $50,000. In the event Mr. Arkin participates in a
registration made by Perrigo, Mr. Arkin will only be
required to bear a proportionate part of such registration
expenses.
The Registration Rights Agreement will not become
effective until the completion of the merger.
Pursuant to the terms of the Nominating
Agreement, Mr. Arkin will be entitled to be nominated to
the Perrigo board of directors and to nominate an additional
independent director (and in the event of a vacancy on the
Perrigo board of directors, to nominate a second independent
director) to the Perrigo board
69
of directors, subject to Perrigo’s
Nominating & Governance Guidelines. Each independent
director will serve on the Perrigo board of directors for the
remainder of the term of the class of directors to which he or
she will be nominated and for one additional full term of such
class. Each independent director will also serve on at least one
committee of the Perrigo board of directors, in accordance with
and subject to his or her respective qualifications. Perrigo has
agreed that one independent director will be invited to serve on
the audit committee of the Perrigo board of directors and one
independent director will be invited to serve on the
compensation committee of the Perrigo board of directors, in
each case subject to their respective qualifications.
Mr. Arkin’s right under the Nominating
Agreement to designate the independent directors (and the right
of the independent directors to serve on the Perrigo board of
directors) will terminate when Mr. Arkin both
(i) ceases to own 9% of the outstanding shares of Perrigo
common stock and (ii) ceases to own 9,000,000 shares
of Perrigo common stock. Mr. Arkin’s right to serve on
the Perrigo board of directors will terminate when
Mr. Arkin ceases to own 5,000,000 shares of Perrigo
common stock.
The Nominating Agreement will not become
effective until the completion of the merger.
Pursuant to the terms of his employment
agreement, following the completion of the merger Mr. Arkin
will serve as Perrigo’s Vice Chairman and be a member of
Perrigo’s executive committee. Mr. Arkin’s
primary duties will include the overall responsibility for long
term strategic planning of Perrigo’s and Agis’
prescription and API businesses, monitoring achievement of
operational and financial results and developing growth and
diversification strategies to achieve ongoing objectives. For
each of the three years of the agreement’s term,
Mr. Arkin is entitled to a base salary of $400,000 and the
opportunity to earn a target bonus of not less than $275,000.
Mr. Arkin will be granted an initial option to
purchase 50,000 Perrigo shares as part of Perrigo’s
October 2005 annual option grant, and his employment agreement
contemplates him receiving additional annual option grants.
Mr. Arkin will also be entitled to all accrued payments due
to him under his current employment agreement with Agis. In
conjunction with his employment agreement, Mr. Arkin
executed a noncompetition and nondisclosure agreement that
restricts his ability to compete with Perrigo for the longer of
the term of his agreement and a period of one year following
termination of his employment.
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Additional Employment
Agreements
|
In addition to Mr. Arkin’s employment
agreement, Agis and Perrigo entered into employment agreements
with Refael Lebel, Agis’ Chief Executive Officer, and
Sharon Kochan, Agis’ Vice President — Business
Development. These agreements will become effective upon
completion of the merger and will replace the executives’
existing employment agreements with Agis.
Pursuant to terms of Mr. Lebel’s
employment agreement, following the completion of the merger
Mr. Lebel will serve as the President of Agis and be a
member of Perrigo’s executive committee.
Mr. Lebel’s primary duties will include the daily
leadership and coordination of the overall operation of the
following businesses: (i) pharmaceuticals outside North
America, (ii) global API, (iii) R&D and regulatory
matters in Israel and India, (iv) pharmaceutical business
development and (v) consumer products in Israel. For each
of the three years of the agreement’s term, Mr. Lebel
is entitled to a base salary of $325,000 and the opportunity to
earn a target bonus of not less than $200,000. Mr. Lebel
will be granted an initial option to purchase 40,000
Perrigo shares as part of Perrigo’s October 2005 annual
option grant, and his employment agreement contemplates him
receiving additional annual option grants. Mr. Lebel will
also be entitled to all accrued payments due to him under his
current employment agreement with Agis. In conjunction with his
employment agreement, Mr. Lebel executed a noncompetition
and nondisclosure agreement that restricts his ability to
compete with Perrigo for the longer of the term of his agreement
and a period of one year following his termination.
Pursuant to terms of Mr. Kochan’s
employment agreement, following completion of the merger
Mr. Kochan will be appointed Senior Vice President,
Pharmaceutical Business Development of Perrigo, and be a member
of Perrigo’s executive committee. Mr. Kochan’s
primary duties will include (i) coordinating long-term
planning process for Perrigo’s pharmaceutical business,
(ii) investigating and
70
recommending acquisitions and divestitures to
meet financial objectives, (iii) identifying joint venture
opportunities in support of business objectives,
(iv) leading negotiations with acquisition targets and
joint venture partners, (v) developing product and product
line strategies and (v) coordinating strategic alliances
and other business relationships. For each of the three years of
the agreement’s term, Mr. Kochan is entitled to a base
salary of $210,000 and the opportunity to earn a target bonus of
not less than $100,000. Mr. Kochan will be granted an
initial option to purchase 25,000 Perrigo shares as part of
Perrigo’s October 2005 annual option grant, and his
employment agreement contemplates him receiving additional
annual option grants. Mr. Kochan will also be entitled to
all accrued payments due to him under his current employment
agreement with Agis. In conjunction with his employment
agreement, Mr. Kochan executed a noncompetition and
nondisclosure agreement that restricts his ability to compete
with Perrigo for the longer of the term of his agreement and a
period of one year following his termination.
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Restricted Stock Awards, Bonus Payments and
Retention Agreements
|
Following the closing, Perrigo will grant to
certain employees of Agis restricted shares of Perrigo common
stock having an aggregate value of $4,100,000 based on the
closing price of Perrigo common stock on the business day
preceding the closing of the merger. The restricted shares will
be granted pursuant to and subject to the terms of
Perrigo’s 2003 Long Term Incentive Plan and will generally
vest based on continued employment in three equal annual
installments of 33 1/3% on the first three anniversaries of
the merger.
Prior to the closing of the merger, Agis may
enter into retention agreements with certain of its employees in
an aggregate amount equal to $1,750,000 providing for retention
payments to such employees generally no earlier than the
completion of the merger, and no later than three years
following the merger.
Prior to the closing of the merger, Agis may
distribute special cash bonuses, in addition to the 2004 annual
bonuses, to certain of its employees in an aggregate amount
equal to $2,750,000.
The chief executive officers of Agis and Perrigo
will mutually agree upon the selection of Agis employees who are
eligible to receive the restricted stock grants, the special
bonuses and the retention payments described above, which
employees may include members of Agis’ senior management.
However, restricted shares having an aggregate value of
$1,000,000 and special bonuses in an aggregate amount of
$1,000,000 will not be subject to such mutual agreement and will
instead be apportioned to Agis employees and service providers
as determined at Agis’ sole discretion.
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Director and Officer Indemnification and
Liability Insurance
|
The agreement and plan of merger requires Perrigo
to cause Agis, as the surviving corporation in the merger, to
indemnify current and former directors and officers of Agis and
its subsidiaries for events occurring before the merger,
including events that are related to the merger, to the fullest
extent permitted under Israeli law. Perrigo has also agreed to
cause Agis, as the surviving corporation in the merger, to
fulfill and honor its obligations pursuant to any
indemnification agreements between Agis and its directors and
officers, any indemnification provisions under Agis’
articles of incorporation and the indemnification resolutions
adopted by Agis shareholders, in each case to the maximum extent
permitted by law.
Prior to the closing of the merger, Agis will
endeavor to purchase directors’ and officers’
liability tail insurance policy, which will provide continuing
coverage for acts and omissions of Agis officers and directors
on terms no less favorable to the insured parties than those
currently in place, for a period of seven years following the
merger at a cost not to exceed $700,000. If Agis is unable to
obtain such insurance policy prior to the merger, Perrigo will
cause Agis, as the surviving corporation in the merger, to
maintain such insurance policy in effect for seven years
following the merger, provided that Perrigo shall not be
required to expend annually more than 300% of the annual premium
currently paid by Agis for such coverage.
71
Accounting Treatment
Perrigo prepares its financial statements in
accordance with applicable SEC rules and regulations and
accounting principles generally accepted in the United States of
America. The merger will be accounted for using the purchase
method of accounting with Perrigo being considered the acquirer
of Agis for accounting purposes. This means that Perrigo will
allocate the purchase price to the fair value of assets acquired
(including identifiable intangible assets) and liabilities
assumed from Agis on the closing date, with the excess purchase
price being recorded as goodwill. Fair value is estimated by
various techniques including analysis of expected future cash
flows and market comparables. Purchase accounting also requires
that adjustments to be made to the acquired entity’s
financial statements to reconcile any differences in accounting
policies between the two entities. Once the fair value is
established for the acquired entity’s assets and
liabilities, the excess of the purchase price over the net asset
value is recorded as goodwill in the consolidated financial
statements.
Under the purchase method of accounting, goodwill
is not amortized but is tested for impairment at least annually.
The amount allocated to in-process research and development will
be charged to operations as of the acquisition date.
Following the completion of the merger, the
earnings of the combined company will reflect purchase
accounting adjustments, including in-process research and
development write-offs and increased amortization and
depreciation expense for acquired assets.
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