Weakened Teva could attract activist investors

Shiri Habib-Valdhorn

After reaching a certain percentage holding in Teva, investment funds could begin demanding changes.

Times are tough for Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) shareholders, who are wondering what could get the company out of its current predicament. The possibility of splitting the company into two is being raised, as well as the hope that some concern will take over Teva at its current price (a market cap of only $20 billion). The company's $35 billion debt, however, constitutes a considerable barrier for any concern (such as a large company or a private equity fund, for example) that might take an interest in the acquisition of Teva under other circumstances.

There is, however, another scenario. An activist hedge fund could take advantage of Teva's weak share to gather shares in the market. After reaching a certain percentage holding in Teva (but less than 10%), funds can begin demanding changes in the board of directors and exerting influence on the company's direction. Such cases are common on Wall Street, and it is not necessary to go far in order to find a similar case – what is now happening to drug company Perrigo Company (NYSE:PRGO; TASE:PRGO). Following the plunge in the company's share price and the market's general disappointment with the company's performance, activist fund Starboard Value began investing in Perrigo a year ago. The fund initially acquired 4.6% of Perrigo's shares, and later increased its stake to 6.7% of the company's share capital. With a 6.7% holding, far from a controlling interest, the fund achieved a position of substantial influence on Perrigo's board of directors.

In February, following pressure from Starboard, Perrigo signed an agreement with the fund, following which four directors left their positions (including former Teva CEO Shlomo Yanai), with three new directors being appointed to represent Starboard. In addition, the fund was given the option to recommend two more directors, so that following these measures, three of the company's 11 directors are representatives of the fund, and two more were recommended by it. The fund did not conceal the direction it wanted Perrigo to go in, including the sale of parts of the company's activity, headed by its generics business.

Teva board on the hotspot

At the current share price, it cannot be ruled out that hedge funds or other investment concerns will spot a future upside by selling chunks of Teva's business to the highest bidder, for example, and will start buying shares in Teva. Afterwards, they will be able to make proposals for the agenda at the shareholders' meeting. For example, it will be possible to demand the elimination of the mechanism by which some of the directors are reelected to the board every year for a three-year term, which makes immediate changes in the board difficult. Later, it will be easier to in effect take over the board of directors. Teva's board has been the focus of criticism from shareholders for a long time, headed by high-tech tycoon Benny Landa. It appears that any concern trying to make changes in the board of directors will have no trouble finding other shareholders to support its proposals at the general shareholders' meetings.

Note that pharmaceutical company Allergan also owns a 9.9% stake in Teva, which it received as part of the price for the sale of Actavis Generics, its generics division, to Teva. These shares were released from their restriction period last week, and Allergan will be able to sell them to some concern interested in taking a position in Teva. Another possibility is that Allergan may prefer to wait until Teva's share price recovers, and is then likely to combine with other concerns with holdings in Teva in order to demand a change.

Published by Globes [online], Israel Business News - www.globes-online.com - on August 7, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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