Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Big pharma just can't resist pricey M&A right now. French drugmaker Sanofi is mulling whether it should gatecrash Johnson & Johnson's attempted takeover of Swiss biotech Actelion Ltd., Bloomberg News reported. The prospect of an auction may excite investors in Actelion. They shouldn't count on a bidding war materializing.

When Sanofi fleshed out its strategy a year ago, management was open about its ambition to use "disciplined" M&A to diversify away from its core diabetes franchise and expand in priority areas like oncology. Earlier this year that discipline was on display when it tried pressurizing U.S. prostate cancer specialist Medivation Inc. into a $9 billion takeover, only to see the target snapped up by Pfizer for $14 billion. Sanofi will not want another bid attempt to go awry.

Sanofi Soars
French drugmaker has outperformed European healthcare stocks as sales beat analyst estimates
Source: Bloomberg

The strategic logic of acquiring Actelion isn't great for either J&J or Sanofi. The target is in a niche area of hypertension which would only sort of fit with Sanofi's broader cardiovascular franchise. J&J may also have some early stage science it thinks Actelion can do something clever with. But the main attraction is simply that Actelion is one of the few biotechs generating sales that that are big enough pep up the results of a big pharma acquirer.

Financially, Sanofi is at a significant disadvantage to its U.S. peer. J&J is worth $305 billion, about three times Sanofi's market value. It will end 2016 having amassed a forecast $20 billion of net cash, while Sanofi will have an estimated 6.4 billion euros ($6.9 billion) of net debt, according to Bloomberg data.

With J&J having dangled an offer of more than $27 billion, according to Bloomberg News, Sanofi would have to take on 24 billion euros of additional borrowings to match the U.S. bidder on price if it didn't raise equity. True, borrowing costs are still cheap -- Sanofi's 10-year bonds are yielding just 1.2 percent even after the recent pickup in rates. Even so, net debt to combined Ebitda would shoot up from about 1 to over 2.5 times. In turn, this would constrain Sanofi from pursuing other, better value M&A opportunities that may pop up.

Borrowing Cost Battle
A global rout in fixed income and wider spreads have driven up the yield on Sanofi bonds
Source: Bloomberg

Sanofi is right to take an exploratory look at a deal now that J&J has put Actelion in play. And a sensibly priced transaction would buy Sanofi a bit of earnings stability. The snag is that J&J is already dangling a price that requires a very long-term view on payback. For Sanofi, that would threaten its claim to be financially disciplined. The one consolation prize from losing the auction for Medivation was that Sanofi avoided overpaying. Better to pass on Actelion than squander a reputation.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net