AstraZeneca Investors Bet on Pfizer Bid Bump: Real M&A

Pfizer Inc. isn’t going to give up that easily when a $100 billion deal is on the line.

The largest U.S. drugmaker is pursuing AstraZeneca Plc to gain a pipeline of cancer treatments that may help reverse a sales slump. While AstraZeneca has so far been an unwilling seller, there’s an 80 percent chance the deal gets done given that AstraZeneca’s share price may otherwise collapse, Morningstar Inc. said. The stock is also reflecting high odds of the transaction closing, with AstraZeneca up 24 percent since Pfizer’s interest was first made public last month.

AstraZeneca, in an attempt to convince its investors that they’re better off not taking the cash-and-stock offer, made a prediction this week that revenue will climb 75 percent by 2023. A prediction is no guarantee, said Albert Fried & Co., which still sees Pfizer returning with a sweetened bid for the tax benefits, growth and savings a deal would bring. MKM Partners LP estimates the new price will be $88 a share, up from about $81 currently, and said Pfizer may sidestep AstraZeneca’s board and take the bid directly to shareholders.

“Pfizer needs to come back to convince shareholders to get the board to engage them,” said Sachin Shah, a special situations and merger arbitrage strategist at Albert Fried in New York. “Pfizer needs to stop all the noise and take control of the situation for them to win. That means making a higher offer and giving more concreteness” on why the deal is attractive for both the company and its shareholders.

Joan Campion, a spokeswoman for New York-based Pfizer, declined to comment on whether it’s considering raising the bid. Michele Meixell, a spokeswoman for London-based AstraZeneca, also declined to comment.

Shares Rise

AstraZeneca said May 2 that it rejected another offer from Pfizer, this time for 50 pounds (about $84) a share in cash and stock. The transaction was valued yesterday at almost $107 billion, including net debt, according to data compiled by Bloomberg.

AstraZeneca’s stock is being buoyed by bets the company will ultimately be sold. On April 17, the last trading day before the talks with Pfizer were reported, AstraZeneca’s American depositary receipts closed at $63.49. They’ve gained 24 percent since to close at $78.74 yesterday.

Today, AstraZeneca’s ADRs fell 1.2 percent to $77.77 at 10:19 a.m. New York time.

Damien Conover, a Chicago-based analyst at Morningstar, estimates AstraZeneca’s ADRs should be valued at $56 apiece in the absence of a takeover.

“We believe the deal will occur, since a failure to engage with Pfizer would likely lead to a significant drop in Astra’s stock price,” Conover wrote in a report dated May 6. “While Astra is making good strides in repositioning its pipeline for growth, we believe the updated outlook presented by management is overly optimistic.”

‘Promising Assets’

The company forecast this week that its yearly revenue will top $45 billion by 2023, following “strong and consistent” growth starting three years from now. That means it’s aiming to increase sales by more than triple the pace it achieved in the decade ended in December, data compiled by Bloomberg show.

In aggregate, products in its pipeline have a 36 percent chance of success and the company isn’t relying on any of them, said AstraZeneca Chief Executive Officer Pascal Soriot, noting that less than a third of the $45 billion projection stems from the pipeline.

“The pipeline does have some very promising assets but, as with any company, we don’t know how that’s going to play out,” Vamil Divan, a New York-based analyst at Credit Suisse Group AG, said in a phone interview. “If something goes wrong with their drugs or competitors that are ahead of them hold onto more of the market, they may not see that value.”

Bump Needed

Pfizer may bump its offer to 53 to 55 pounds a share, according to Divan, which equates to about $89 to $93 based on yesterday’s currency conversion rates.

“Somewhere in that range is probably what’s needed,” he said. “If it gets into that range, AstraZeneca would need to consider it. There aren’t a lot of other companies like Pfizer that would approach them, and the stock would certainly go back to where it was before all this started if they don’t sell.”

Keith Moore, an event-driven strategist at MKM Partners, said in a phone interview that he’s anticipating Pfizer will raise its bid to “somewhere around $88, with the cash percentage upticked a bit.” A higher portion of cash may appeal to AstraZeneca shareholders to offset the recent decline in Pfizer’s stock price, he said.

On top of the strategic merits to the acquisition, buying AstraZeneca would give Pfizer a lower tax rate because the combined company would be a corporate resident of England. That will provide more freedom for Pfizer to have access to its overseas cash without being subject to the significant repatriation tax it now faces, Divan of Credit Suisse said.

Job Concerns

U.K. lawmakers are concerned though that Pfizer will cut jobs and research investment in Britain. An analysis by Bloomberg Industries shows that raising the offer would likely mean even more job cuts so that the deal remains accretive.

That said, AstraZeneca has already been reducing its workforce. A year ago, the company announced it was cutting 2,300 sales and administrative jobs and 1,600 research positions as it tries to restore profit growth after patents expired for some of its best-selling medicines.

AstraZeneca had 51,600 employees as of Dec. 31, down from 53,500 at the end of 2012 and 59,800 the prior year, according to data compiled by Bloomberg.

“AstraZeneca is trying to paint the picture that the employees are going to stay and that this pipeline is very robust,” Shah of Albert Fried said. But the pipeline projections “are suspect,” and the employee argument is “disingenuous because they’ve already been cutting jobs.”

Hostile Bid?

Pfizer has pledged to keep about 20 percent of the combined company’s research and development workforce in the U.K. for at least five years.

As to whether Pfizer’s offer will turn hostile, Shah says it won’t because the deal is so large that Pfizer needs AstraZeneca’s help to get regulatory approval and to integrate the companies.

“You need all hands on deck to get this deal across the finish line,” he said.

In order for a hostile offer to succeed in the U.K., the buyer typically needs the support of shareholders representing 90 percent of the shares outstanding. In a friendly deal, the threshold is lower.

Pfizer’s need to fill gaps in its business and restore growth is so strong that a hostile bid isn’t out of the question, Moore of MKM said. Under U.K. takeover rules, Pfizer has until May 26 to make an offer.

“By the end of May Pfizer will have to decide whether to go hostile or not, and my guess is they do,” Moore said. “There aren’t many other potential targets that can satisfy what Pfizer needs.”

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