Jana’s Rosenstein Has a Different Remedy for Charles River

Activist hedge fund manager Barry Rosenstein of Jana Partners is turning up the heat on Charles River Laboratories.

Rosenstein, who owns about 7 percent of the shares, thinks the drug research company will short change investors if it completes its announced plans to purchase Chinese rival WuXi PharmaTech (Cayman) for $1.6 billion in cash and stock, or $21.25 a share. On Friday, Rosenstein fired off at least his third lengthy letter to management hoping it would change its mind or to convince shareholders to oppose the deal.

In his latest salvo, Rosenstein asserts that Charler River’s recent investor presentation is flawed and would hurt investors. He insists Charles River claims that the transaction will generate at least $75 million to $100 million of revenue synergies on an annual basis by 2013 are speculative at best and run counter to industry perceptions of the transaction as well as practical industry dynamics.

“Even assuming such synergies were plausible, given the excessive premium Charles River proposes to pay for Wuxi, this transaction if completed would generate highly inadequate returns,” Rosenstein adds in a letter. He also argues that Charles River's prior acquisition history and inadequate returns on capital, despite significant expenditures over the years, are cause for further alarm in evaluating the proposed acquisition, particularly given the significant strategic and integration risks of a WuXi acquisition.

Rosenstein, who manages about $2.7 billion, down from $8 billion at the end of 2007, proposes an alternative way to enhance value of Charles River shareholders. He calls for a major share repurchase, which he insists would create substantial value immediately without integration risk. He also says a sale of the company could also generate significant value.

Rosenstein cites analysis to back up his claim that if you separate Charles River’s business, the sum of the parts would be worth at least $47 per share. This is 38 percent higher than its current stock price of $34. The hedge fund manager says that Charles River’s research models business, given its strong margins and steady performance, is worth $32 per share as a stand-alone company and that its preclinical business is worth $15 per share. “By our model, a leveraged recapitalization could add up to $6/share,” he adds. Shares of WuXi, meanwhile, have slumped below $16.

Rosenstein, who founded Jana in 2001 with Gary Claar, has a strong track record as an activist. In 2005, he and Carl Icahn teamed up to launch a proxy fight against Kerr-McGee before the energy firm agreed to some of their suggestions to boost its stock, including a massive stock buyback. In June 2006, Anadarko Petroleum acquired the company for $16.5 billion plus the assumption of debt.

More recently, Jana and Canada’s Alberta Investment Management Corp. (AimCo) teamed up to convince Dutch mail and express delivery company TNT to separate its two businesses.

Last year, Convergys agreed to expand the size of its Board of Directors to include Rosenstein and former Alltel COO Jeffrey H. Fox as well as one new independent director, mutually agreed upon by Convergys and JANA. The relationship management company subsequently named Fox president and CEO.