Business

Can Takeda Have Its $62 Billion Cake and Eat It?

Drugmaker thinks it can pay a steep premium and generate returns.

Corrected

The exterior of Takeda Pharmaceutical Co.'s building in Cambridge, Massachusetts.

Photographer: Scott Eisen

It looks like a scientific breakthrough in its own right. Takeda Pharmaceutical Co. has agreed to buy Shire Plc for 65 percent more than the rare-disease specialist's value just a few weeks ago — yet the Japanese drugmaker reckons the deal stacks up financially from day one. This unusual combination of a steep premium and shareholder returns is possible only because Shire went into the negotiations with a lowly valuation and weak credibility.

On Tuesday, Takeda firmed up a 46 billion-pound ($62 billion) bid which, if successful, will double the bidder's revenue, strengthen its neuroscience and gastroenterology businesses, and catapult the group into the big league of global pharmaceutical companies.

Bad Medicine

Takeda's stock has deflated since the company revealed its interest in buying Shire

Source: Bloomberg

Just under half the price will be paid with borrowed money. Takeda will print new shares to pay for the rest. Despite nearly doubling its share count, the company says its underlying per-share earnings will rise in the first year of ownership.

Returns look acceptable too. The total cost, including assumed net debt, will be some $81 billion. The starting return looks to nudge 7 percent, in line with Takeda's current estimated cost of capital. Arguably, the bar should rise with this deal: Shire is a risky asset and combined leverage is likely to shoot up to more than 4.5 times Ebitda when the acquisition is expected to complete in the middle of next year.

Still, exceeding even a raised returns hurdle looks achievable within three years. Takeda expects to reap $1.4 billion of annual pretax savings in that time. Some $600 million of this will come from R&D. It may see overlaps or scope for a more disciplined approach to Shire's research. The fear must be, though, that the indebted tail is wagging the science dog.

All in all, this doesn't look like a particularly expensive deal. Moreover, the fear of flowback — forced selling of the stock component by Shire shareholders who can't, or won't, take Takeda paper — could plausibly be mitigated by forced buying from index funds that need to hold shares of this new behemoth.

Takeda shareholders have been worried about the acquisition, sending the stock down 16 percent since the idea surfaced. Even with the full details, they still have reason to fret. This is one big and risky endeavor. It will stretch boss Christophe Weber and strain Takeda's balance sheet. The group wants to bring net borrowings to twice Ebitda within three to five years. It may need disposals or a dilutive stock offering to get there.

The Long and Short of it

Takeda's offer for Shire just pips its recent share price high of almost a year ago

Source: Bloomberg

Really it is Shire shareholders who should be less than ecstatic. The deal takes them from a bad place to a reasonable one. Shire stock was roughly at the offer price in May last year. But the company's senior managers — collectively, now in line for $9.1 million of retention payments — didn't have the authority to reject this bid.

Shire's owners have two routes to a much better place. A recovery in Takeda stock would lift the value of the offer. And a counterbidder may be emboldened now that it knows what it has to beat.

(Corrects timescale for reduction in net borrowings in seventh paragraph to three to five years)

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

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    Chris Hughes at chughes89@bloomberg.net

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