August 16, 2007

DUSSELDORF, Germany — An appeal court in Germany has ruled that it does not have the authority to overrule a previous court ruling that effectively blocked Sonova Holding Group’s (formerly the Phonak Holding Group) proposed 15.5 DKK ($2.65 billion) purchase of GN’s hearing-related business units, including ReSound, Beltone, Interton, and GN Otometrics. The share purchase agreement ended yesterday (August 15) after which each party can unilaterally terminate the transaction. Sonova has reported in the business press that it has decided to pull out of the deal.

Last Wednesday (August 8), the appeal court (Oberlandesgericht) in Dusseldorf, Germany, rendered its decision on the application for injunctive relief to close the sale of GN ReSound to Sonova (formerly Phonak Holding Group). In line with the indications given in the previous hearing on August 1, the court decided that it does not have the power to grant injunctive relief in merger prohibition cases, since only the German Federal Cartel Office (FCO, or Bundeskartellamt) can authorize parties to implement a merger before it has been cleared.

In parallel to the main appeal case, GN and Sonova applied for injunctive relief to close the transaction quickly, one of the arguments being that a normal time-consuming court process would damage GN’s hearing instrument business. The court decision last Wednesday effectively excludes the possibility of injunctive relief.

Although the parties may be considering further judicial steps in relation to the German legal proceedings, Sonova has cited that the terms of the share purchase agreement with GN Store Nord A/S allow the parties to terminate the transaction if the conditions of the closing have not been obtained by August 15.

On October 2, 2006, GN signed an agreement to sell GN ReSound to Sonova for a total consideration of DKK 15.5 billion ($2.65 billion) in cash on a debt and cash free basis. The transaction was subject to approval by the competition authorities in a number of countries. In April 2007, the FCO decided to prohibit the transaction, claiming that this would result in “collective market dominance” in the German hearing instrument market, prompting GN and Sonova to appeal the decision.

Both companies have been highly critical of the FCO decision that blocked the deal. According to Phonak, the concerns of the FCO were not motivated by a fear that Phonak, as an individual competitor, could obtain a dominant market position; rather, the FCO claims that there will be an oligopoly (or collective market dominance) in the German hearing aid market as a result of the combination. During a press conference held at April’s AAA Convention in Denver, Phonak CEO Valentin Chapero characterized the ruling as a “theoretical structural argument” based on maintaining the balance of a set number of major competitors in the German market, with Siemens being the only company having a dominant market position. Chapero was careful to emphasize, however, that he did not believe German-headquartered Siemens had any complicity or influence in the court’s decision. He contended that the FCO ruling is bad for all of the major hearing aid companies because it effectively prohibits any future global mergers if those companies have a significant stake in the German market which constitutes about 10% of worldwide hearing aid sales. Chapero served as president of Siemens Audiologische Technik from 1996-1999.

GN has stated that the ruling, if upheld, provides the FCO with unfettered power to prohibit mergers without effective judicial review, as transactions cannot be kept in limbo for years awaiting the outcome of main proceedings.

If the transaction is terminated, GN says that it will pursue all strategic options including, but not limited to, a listing of GN Store Nord into two separate listed entities. In view of the FCO ruling, the list of potential buyers would probably be limited to Starkey Laboratories and Widex from within the hearing industry, or a buyer from outside the industry.

Chapero says that Phonak expects double-digit growth this year while the rest of the hearing instrument market will grow by 6-9% worldwide, with market growth being a function of hearing aid penetration, the aging population, and the increase in the number of dispensing offices. The business press reports that the company could have 500 million Swiss Francs ($415 million) in liquidity at year’s end if the GN acquisition is blocked, in which case Phonak may initiate a stock-buyback program.

Source: Hearing Review Insider