King Pharmaceuticals

(KG)

has agreed to buy

Jones Pharma

(JMED)

, a maker of thyroid disorder drugs, for stock initially valued at $3.4 billion, the companies said Thursday.

But Wall Street showed an immediate distaste for the acquisition, as investors sold off King's shares, reducing the deal's value to $2.7 billion by the close of trading Thursday. The selloff eliminated any premium that Jones shareholders would receive over their stock's closing price Wednesday, and Jones stock also fell sharply.

"King is buying a so-so company that does not have a pipeline of products," said Timothy Anderson, an analyst for

Prudential Vector Healthcare

.

Bristol, Tenn.-based King is a seller of branded pharmaceutical products. King would exchange 1.125 of its shares for each Jones share. King shares, which opened at 45 5/8, fell as low as 32 before recovering a bit to close down 8 7/8, or 20%, at 36 9/16. Under the terms of the deal, Jones' board could terminate the agreement if King's shares fall below an average of 29 1/3 for 20 trading days.

King initially valued the deal at $51.12 a share based on Wednesday's closing stock price, and that represented a 16.8% premium over Jones' stock price of 43 3/4. But by the close of trading Thursday, the 1.125 King shares were worth just $41.13. In turn, shares of Jones fell 4 1/4, or 9.71%, to 39 1/2.

Anderson said that buying Jones diversifies King's product portfolio, adds scale and will likely add to the company's earnings. Still, "people have been lukewarm to this deal," he said. "Hopefully, management won't oversell the deal."

Anderson rates King shares a strong buy, and his firm hasn't done underwriting for either company.

In a conference call with analysts, Dennis Jones, the chairman of Jones Pharma, said that the idea to discuss a merger was his and that he first met with King officials on May 31.

"I felt that it required younger management to take Jones to a newer level," Jones said. "I want to spend some time smelling the roses."

In the weeks preceding the announcement, the

Summit Fund LLC

, a 10% shareholder in King, registered to sell 500,000 shares on July 7, according to filings with the

Securities and Exchange Commission

. The fund is controlled by the

United Company

, of Bristol, Va.

Two officers of the United Company, Lois A. Clarke and Ted G. Wood, are listed as current directors of King. In the conference call, King officials said the two directors retired from the board in May and were unaware of the merger discussions. Their resignations were never disclosed because they were voluntary, King officials said in the conference call.

Neither Wood, president of the United Company's operating company, nor Clarke, executive vice president and chief financial officer of the United Company, returned calls. A person who answered the telephone in Wood's office said both had resigned from the board recently, then declined to comment further.

The deal has been approved by the boards of both companies but requires a majority vote from shareholders of both companies. Either party would have to pay $100 million to walk away from the deal.

Following the completion of the merger, which is also subject to regulatory approvals, Andrew Franz, Jones' chief operating officer, would become president and CEO of Jones Pharma, as a wholly-owned subsidiary of King.

The companies said the deal is expected to close by the end of the year.