Bayer Said to Consider Bid for Pfizer Animal-Health Unit
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Bayer is in the early stages of considering a bid and may ultimately decide against making one, said the people, who declined to be identified because the process is confidential. The Pfizer veterinary business is likely to fetch $14 billion to $18 billion in a sale, according to research firm Leerink Swann LLC. Novartis AG (NOVN), Europe’s second-biggest pharmaceutical company, may also be interested in the business, people familiar said.
Bidding for the Pfizer unit would be Bayer’s second major attempt in three years to bulk up its veterinary-products operation. The Leverkusen, Germany-based company offered 6 billion euros to 7 billion euros ($9.2 billion) in 2009 for Schering (SCH)-Plough Corp.’s Intervet unit, two people with knowledge of the situation said at the time. Bayer was unable to do that deal after the sale was scrapped by the owner.
Pfizer’s decision to sell or spin off the unit “will come down to price,” said Les Funtleyder, a health strategist and portfolio manager at Miller Tabak & Co. in New York, where he helps oversee $500 million in assets. The animal-health division would make sense for either Bayer or Novartis as a way to supplement their existing animal health lines, he said.
Pfizer has been considering a full or partial sale, or a spinoff of the unit, since July. The New York-based company plans to make a decision this year, with a potential transaction to occur between July 2012 and July 2013, Pfizer said Jan. 31. Pfizer is likely to pursue a spinoff, as that would be more tax- efficient than a sale, a person familiar with its plans said.
If Bayer made a bid before a spinoff, it might be asked to cover the tax liabilities, which could cost Pfizer as much as $5 billion, people with knowledge of the situation said. On the other hand, waiting to bid until after a spinoff could make the animal-health unit more expensive, if it performs better than expected or if other bidders express interest, they said.
Bayer rose 2.5 percent to 54.68 euros in Frankfurt, giving the company a market value of about 45.2 billion euros. Pfizer shares rose 18 cents, or less than 1 percent, to $21.55 at 6:35 p.m. in New York.
Christian Hartel, a Bayer spokesman, declined to comment on market speculation. A Pfizer spokeswoman said the company had not yet decided on a spinoff or sale. A Novartis spokeswoman said the company doesn’t comment on rumor and speculation.
Paying more to compensate a seller for tax costs isn’t unprecedented. When Kellogg Co. (K) agreed to acquire Procter & Gamble Co. (PG)’s Pringles potato chip business last month, it offered almost 15 percent more than Diamond Foods (DMND) had in a failed earlier bid. Most of the price differential was to cover the tax hit, which P&G had avoided in the Diamond transaction because it was constructed as a reverse merger, according to a person familiar with the matter.
“Our decision about strategic options will be driven by value creation for the business and delivering the best after- tax value for our shareholders,” Joan Campion, a spokeswoman for Pfizer, said via e-mail.
‘A Great Business’
Bayer wants to strengthen its health-care unit, Chief Executive Officer Marijn Dekkers said Feb. 28 when the company reported fourth-quarter earnings. “Pfizer animal health is a great business,” Dekkers said. “I don’t want to comment on our interest.”
Novartis recently approached Pfizer about buying the unit, the Wall Street Journal reported, citing people familiar with the matter. The preliminary offer, which valued the unit at as much as $16 billion, was rebuffed, and it’s unclear whether Novartis will make a new bid, the newspaper said.
“We’re focusing on our previously communicated strategy of seeking bolt-on acquisitions rather than larger transactions,” Beth Calitri, the Novartis spokeswoman, said by phone today.
Pfizer is unlikely to hold talks over a sale of the unit with any bidder prior to its decision on a spinoff because such negotiations would undermine the tax benefits of the spinoff. They could also delay a subsequent deal by at least a year under U.S. law, according to Robert Willens, a tax-accounting analyst in New York who advises investors.
“There’s almost no chance two companies in that situation would engage in talks before a spinoff,” Willens said. “As long as there has been no agreement or substantial negotiations, the acquisition can occur without jeopardizing the tax-free nature of the spinoff.”
Pfizer is shedding its animal health and nutrition businesses as part of Chief Executive Officer Ian Read’s plan to focus on developing new prescription drugs after losing patent protection for Lipitor, a cholesterol pill and the world’s best- selling medicine.
While tax-free spinoffs have the potential to obtain the greatest value for investors, Danone SA (BN) and Nestle SA (NESN) are vying to buy Pfizer Inc.’s infant-nutrition unit, two people with knowledge of the matter said last month. The two companies are working on ways to overcome antitrust hurdles after submitting preliminary bids of about $10 billion, the people said.
Pfizer’s veterinary business, the biggest in the industry, had revenue of $4.18 billion last year, up 17 percent from 2010. Bayer Animal Health’s sales rose 5.9 percent last year to 1.19 billion euros, making it the fifth-largest, according to data compiled by Bloomberg News. Sales in Bayer’s drug business declined 0.1 percent last year.
The German company has the means to finance a “significant” acquisition using debt, equity and its portfolio assets, Chief Financial Officer Werner Baumann said in an interview on Feb. 28.
Bayer may consider a sale of its plastics operation known as Bayer MaterialScience to finance major bids such as an offer for the Pfizer unit and to protect its credit rating, two of the people said. The unit reported almost 10.8 billion euros in revenue last year, up from 10.1 billion euros in 2010. It may be valued at 8 billion euros, excluding any takeover premium, Kepler Capital Markets analyst Fabian Wenner wrote in a note on Feb. 9.
Bayer operates three main businesses: Bayer HealthCare, which includes pharmaceuticals, consumer-health products and veterinary drugs; Bayer MaterialScience; and an agricultural- chemical unit called Bayer CropScience.
The animal-health unit manufactures products in Kiel, Germany, and Shawnee, Kansas. The company’s brands include the Advantage flea- and tick-control products for dogs, and Baytril to control infectious diseases in livestock and pets.
Dekkers said in September 2010 that the company needed to decide the future of the animal-health unit in 12 to 18 months. The business is “relatively small” compared with its competitors, he said at the time.
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