Midnight Looms Large for Mylan

The company hopes a big stock buyback will help persuade Carl Icahn to move on.
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The deadline for

Mylan Laboratories'

(MYL) - Get Report

massive stock buyback is just a few hours away, and the company is hoping the repurchase will help boost its shares and convince investors it's headed in the right direction.

The $1.25 billion buyback, expiring at midnight Friday, is part of a larger plan for encouraging Wall Street to take notice of strategic changes and for suggesting to Carl C. Icahn that he take a hike.

Depending on the price, Mylan could repurchase up to 25% of its shares. If the buyback leads to Mylan's stock rising, investors might be less interested in Icahn's buyout offer of $20 a share, which the board has repeatedly rebuffed. Icahn is the largest shareholder with about 9.8% of shares.

Mylan's stock closed at $17.70 on June 13, the day before the buyback was announced. The stock closed at $19.76 on Thursday.

There's more to

Mylan's strategy than the big buyback, including a newly raised dividend, several cost-cutting measures, a refocus on generic drugs, and a reduction in the number of insiders on the board.

Although Mylan says it made these changes in the name of improving corporate governance and shareholder value, it's clear that the moves also have been aimed at Icahn. He has hovered over Mylan since it tried to acquire

King Pharmaceuticals

(KG)

12 months ago.

The King bid sent Mylan's stock down as many analysts criticized the proposal. Icahn swooped in to buy Mylan shares and became

the loudest opponent of the King acquisition. The deal was canceled in late February.

King is gone, but Icahn is still around. He has nominated a slate of directors to challenge company-endorsed candidates at the Mylan annual meeting in late October.

Icahn Go Home!

Mylan has done its best to make Icahn feel unwelcome. It

changed the rules on scheduling its annual meeting, which usually was held in late July, forcing Icahn to quickly assemble a list of director-nominees. It also announced that all employees would get enhanced severance pay if they lost their jobs within two years after a takeover.

Mylan changed the rules of its shareholder rights plan to discourage unwanted takeovers or large investments by unwanted investors. Originally, the poison pill had a 15% trigger point, but during the King discussions, Mylan cut that to 10%. Even though King is gone, the 10% rule remains through the end of the year.

Mylan's stock buyback won't affect the poison pill. In theory, if Icahn held all of his shares, and Mylan bought back 25% of its stock, Icahn would have about 13%. But the buyback's rules say the poison pill won't be enacted in this case.

There are more recent ways in which Mylan has tried to make Icahn go away. Mylan's recent $775 million debt offering to help finance the stock buyback contains provisions that make a hostile takeover financially unpleasant.

Will He Stay or Will He Go?

Analysts aren't sure what Icahn will do about the buyback, which is designed as a modified Dutch auction in which Mylan sets a price range of $18 to $20.50 a share and chooses the best price offered by investors to meet its buyback goal.

Mylan wants to repurchase $1 billion worth of stock via the auction and another $250 million in the open market after the auction is completed, and some analysts believe the auction will be oversubscribed.

SG Cowen's analysts, who are neutral on Mylan, figure Icahn could make a $46.5 million gross profit if he sells his shares at $19.25 a share -- the midpoint in the Dutch auction range. Icahn paid an average of $17.46 a share for multiple purchases, says the Cowen report, whose calculations exclude transaction costs.

Cowen predicts Icahn will sell some, but not all, of his shares so he can play a role during Mylan's annual meeting. (The Cowen report's authors or members of their households own Mylan shares. Cowen says it does or seeks to do business with companies mentioned in research reports.)

"We expect Carl Icahn to remain a significant shareholder," say two recent reports by Lehman Brothers, which has an overweight rating on Mylan. "While Icahn might have financial incentives to tender some of his shares ... he is unlikely to dispose of his entire stake."

Lehman, which says Mylan's Dutch tender is one of the largest in U.S. history, notes that Icahn faces a difficult choice. "If the market believes that Icahn tendered shares below or at his current proposal of $20, Icahn's future credibility in contested situations might be adversely affected," the firm says.

Because of Icahn's big stake, a decision to sell all shares "would likely reduce the acceptance price" paid by Mylan and increase the chance that the Dutch auction will be oversubscribed. In that case, Mylan will repurchase shares on a prorated basis at or below the acceptance price. Investors tendering shares above the acceptance price will have their shares returned to them.

If the Dutch auction is heavily oversubscribed, "the market may infer that Icahn has tendered his shares, and that could provide a negative signal for the short-term performance of the stock," Lehman says. (The firm's analysts who prepared the Mylan reports don't own Mylan shares. Lehman says it does and seeks to business with companies mentioned in research reports.)

The buyback was on the minds of analysts Monday when

Mylan served up a preliminary earnings prediction for the quarter ended June 30 that topped the Wall Street consensus. Mylan said it was releasing the results so that investors could determine if they wanted to participate in the Dutch auction. Formal results for the fiscal first quarter will be presented July 19.

"Dressing up for the auction" was how Cowen characterized Mylan's announcement. The reason for preannouncing "is to attract shareholders to participate" in the buyback, says Marc Goodman of Morgan Stanley in a July 11 report to shareholders. "We think investors will view the 'adjusted' EPS with skepticism." Goodman has an equal-weight rating on the stock. He doesn't own shares, but his firm has had an investment banking relationship with Mylan.