Guidant Suitors Refuse to Yield

Boston Scientific makes its bid definitive, while J&J defends the merit of its offer.
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Boston Scientific

(BSX) - Get Report

has strengthened its bid for fellow medical-device maker

Guidant

(GDT)

, but

Johnson & Johnson

(JNJ) - Get Report

doesn't appear inclined to simply step aside.

Boston Scientific made a definitive $25 billion offer this weekend for Guidant, confirming its December proposal for the troubled maker of pacemakers and heart defibrillators.

The new offer includes a twist, however. Boston Scientific has reached a binding agreement that, if its takeover is successful, would see

Abbott Laboratories

(ABT) - Get Report

buy Guidant's vascular intervention and endovascular businesses for more than $4 billion. The companies would also share rights to Guidant's drug-coated stent business with Abbott.

Due to the nature of the deal, unlike Johnson & Johnson's

initial bid to acquire Guidant, Abbott can't back out of the deal, Boston Scientific says. There are "no conditions or contingencies in our agreement with Abbott," Boston Scientific executives said in conference call discussing its acquisition offer Monday.

Boston Scientific shares were down 1.8% at $25.78. Guidant shares, meanwhile, were up $2.44 to $68.99. J&J shares were adding 0.1% to $62.65.

Last month, Boston Scientific said it would divest those Guidant businesses to secure antitrust approval for the acquisition. Boston Scientific's proposal is valued at $72 a share, vs. around $64 in J&J's offer for Guidant.

Guidant's sales and share price have suffered since June, when it began recalling and issuing safety warnings on tens of thousands of pacemakers and defibrillators. It now faces a slew of lawsuits, as well as investigations by state and federal authorities.

Nevertheless, its problems haven't stopped rivals from trying to buy it. Boston Scientific hopes its bid will beat the smaller one from J&J. Boston Scientific says it will do whatever it takes to help Guidant's cardiac rhythm management group improve its recovery, which, according to SG Cowen's medical-devices analyst Dhulsini de Zoysa, includes taking on massive earnings dilution.

According to her estimates, Boston would see earnings of $1.42 a share in 2006 after acquiring Guidant. On average, analysts surveyed by Thomson First Call expect Boston to earn $1.83 a share for 2005 and $1.86 a share in 2006.

SG Cowen does and seeks to do business with companies covered in its research reports.

Despite its lower bid, J&J says its proposal is better for Guidant shareholders and employees.

"We intend to dedicate the resources necessary to enable Guidant to achieve a full and complete recovery in the cardiac rhythm management market, and to achieve and sustain leadership in interventional cardiology," J&J CEO William Weldon said in a press release. "In becoming shareholders of Johnson & Johnson through the exchange of Guidant stock, Guidant shareholders would join a group of investors who have seen our company achieve over 70 consecutive years of sales growth, more than 20 years of increased earnings, and 43 consecutive years of dividend growth."

While Guidant's board has

already approved the deal with J&J, the company entered discussions with Boston Scientific and performed due diligence on that bidder. Shareholders are set to vote on the J&J deal Jan. 31.

"At this point, we would expect Guidant shareholders to go for the higher bid," says Jason Wittes, biotech analyst at Leerink Swann, in an interview. But "never say never" on whether J&J is likely to bid higher in response to its competitors' formal proposal, he says.

Leerink Swann doesn't have an investment banking relationship with Guidant, Boston Scientific or J&J, but a board member of Guidant is also a board member of Leerink Swann.

Boston believes Guidant will see a continued decline in sales of cardiac rhythm devices this year, but growth should return in 2007 and 2008, a forecast it called conservative.

Separately, Boston estimated net sales for the year ended Dec. 31 at $6.28 billion, up 12% from $5.62 billion in 2004. Preliminary sales for the fourth quarter were $1.54 billion, a bit short of Wall Street's consensus target of $1.59 billion.