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A Patheon technician at work

Hostile takeover battles are nasty by nature, but the eight-month fight by a New York-based private equity fund to buy Canadian drug maker Patheon Inc. is beginning to make the average buyout tussle look like a love-in.

Patheon is small, with a market value of just $225-million, so the fight has attracted little attention. Yet it raises important questions about whether regulators should limit how long takeover bids can remain outstanding, or whether at some point a bidder should be forced to declare defeat.

Since December, when hedge fund JLL Partners said it wanted to buy Patheon for $2 (U.S.) a share, there have been lawsuits seeking damages in the hundreds of millions, fights at the Ontario Securities Commission, two proxy battles and many unkind words.

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Through it all, JLL has so far been unsuccessful. Though it is by no means certain that Patheon can continue to hold off indefinitely what it calls a "siege" by JLL, the would-be buyer has so far accumulated only 39 per cent of Patheon's shares from sellers and the stock trades above the bid price. What's more, the number of shares coming into JLL's accounts from investors has slowed to a trickle, forcing JLL to extend its bid yet again.

The defence got tougher for Patheon Wednesday when JLL announced in a surprise move that they're converting a stash of preferred Patheon shares into common stock, which will increase the suitor's stake to 57 per cent. The majority may help JLL take control of Patheon's board at a meeting scheduled for this October.

For many, the vituperative nature of the battle is a surprise, because it was JLL's investment of $150-million in Patheon two years ago that enabled the company to restructure and get through tough times. Without JLL, Patheon might not have survived, said Maher Yaghi, an analyst at Desjardins Securities.

"It is weird, because in one way JLL was there to help in the restructuring and to try to help the company, and on the other hand you see shareholders are not liking how they are doing this buyout," he said.

Patheon was struggling in large part because the 2004 acquisition of a Puerto Rican drug maker called MOVA had gone sour, becoming a big money-loser.

After cutting costs and restructuring with the aid of JLL, Patheon was showing signs of returning to profitability late last year, but the stock was still in the doldrums until JLL showed up with a bid that was more than double where the shares were trading.

"When they look at Patheon they see a company that is turning profitable and they are saying to themselves, 'If nobody is willing to buy the stock, we'll buy it,'" Mr. Yaghi said.

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As part of the bid, JLL cut a deal with the former owner of MOVA, Joaquin Viso, who became Patheon's largest shareholder and a Patheon director after the buyout. But unlike most agreements with major shareholders, which commit the investor to sell, this one explicitly enabled Mr. Viso to keep his shares even if JLL succeeded. He didn't want to sell for $2.

That deal with JLL may have cost him his board seat, as other shareholders voted him off in April.

Because JLL is an insider of the company under securities laws, it is required to gain the support of independent investors holding at least 50.1 per cent of the shares JLL doesn't already own. Even with less than 40 per cent, JLL shows no sign of quitting.

"We're looking to give the public a chance to evaluate the offer based on a level playing field and we want to continue to provide the opportunity for folks to take a liquidity option if they deem fit," said JLL spokesman Brian Wade.

Paul Currie, who heads the special committee of Patheon directors fighting the JLL bid, said he is troubled by how long JLL has been able to leave its bid outstanding.

"We've continuously said we are comfortable with our strategy and that the independent path is going to create more value for shareholders than the $2 offer from JLL," he said.

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Patheon argues that it's not averse to selling, but that the price should be closer to $5 a share, based on a valuation prepared by the company's bankers.

Mr. Yaghi thinks the company is worth $3.75, but he doesn't see an alternative to the JLL bid or any reason that JLL would raise its bid.

"It seems like it could go forever, and one of the strategies [for JLL]could be you try to get investors to say, 'I'm tired of this … this is going nowhere any time soon so I might as well go on to something else.'"

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