Tick, tick, tick.
That's the sound of Elan
Looks like Johnson & Johnson is using the clock to its advantage. The Wall Street Journal reports that the health-care giant is trying to shave $100 million off the $1 billion cash it agreed to invest in Elan, possibly in exchange for removing the clause that's causing Elan to violate its contract with Biogen -- a provision that gave Johnson & Johnson the option to buy the other half of Tysabri in the event of a change of control at Biogen.
While Elan, a Motley Fool Rule Breakers pick, desperately needs an infusion of cash -- it has more than $1.7 billion in debt due over the next four years -- the company doesn't need the money right this second, because the first major installment of its debt isn't due until November 2011. Whether Elan has the flexibility to tell Johnson & Johnson to go jump in a lake if it asks to shave too much off the deal may depend on whether the rumors of Elan working on deals with Pfizer
Elan's investors should keep in mind that Johnson & Johnson is getting shares for the $1 billion it's agreed to invest, albeit at an above-market price. If Johnson & Johnson and Elan keep the share price the same, and Johnson & Johnson invests $900 million instead of $1 billion, the lost value to Elan -- assuming it could do a secondary offering at today's price for the "unsold" shares -- is just $18,500 or so. That's probably not enough to fight with its new best buddy over.
I guess we'll know how good a friendship the companies have developed in the next 13 days. Tick, tick, tick.
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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Pfizer is an Inside Value selection. Johnson & Johnson is an Income Investor recommendation. Novartis is a Global Gains pick. The Fool has a disclosure policy.