The case for Pfizer’s proposed takeover of AstraZeneca

Pfizer and AstraZeneca

U.S. pharma giant Pfizer’s (PFE) second takeover proposal, of $106 billion (£64 billion), was rejected by Anglo-Swedish drug maker AstraZeneca (AZN) last week on the grounds that the proposal “substantially undervalued” the company. With Pfizer maintaining that its offer is “compelling” and its pursuing its British rival to engage in talks, the takeover proposal has stirred political and industry debates on both sides of the Atlantic.

There has been increasing speculation that Pfizer could go could go hostile to gain control. However, Pfizer CEO Ian Read maintained that “it is in the best interests of both companies and shareholders” to pursue a friendly negotiated transaction. Under the UK takeover code, Pfizer has until May 26 to make its intention clear to announce an offer or walk away from the deal. If the deal goes through, it would represent the biggest foreign takeover of a British company and would create a possible rival to Johnson & Johnson (JNJ).

The New York–based Pfizer is a research-focused global bio-pharmaceutical company. Its global portfolio includes medicines and vaccines, as well as many of the world’s best-known consumer healthcare products. The company’s annual $50 billion revenues derive from the sale of its products, and, to a much lesser extent, from alliance agreements, under which it co-promotes products discovered by other companies. AstraZeneca is Britain’s second-biggest pharmaceutical company after GlaxoSmithKline (GSK), with annual revenues of $25 billion. It focuses on the discovery, development, and commercialization of prescription medicines, primarily for the treatment of cardiovascular, metabolic, respiratory, inflammation, autoimmune, oncological, infection, and neuroscience diseases.

Pfizer confirmed that a similar bid back in January, representing £46.61 a share (amounting to $100 billion), was considered to be too low by AstraZeneca. According to Pfizer, discussions were renewed regarding a possible combination on April 26, “in light of recent market developments.” Pfizer sweetened the offer on May 2 and the new proposal represented an indicative value of £50.00 ($84.47) per AstraZeneca share, valuing AstraZeneca at approximately £64 billion. AstraZeneca said its board has rejected the proposal also due to the “large proportion of the consideration payable in Pfizer shares and the tax-driven inversion structure.”

Pfizer’s rationale for the merger is that the deal would combine two “highly complementary innovative and established pharmaceutical businesses, enhancing the combined company’s ability to meet patients’ needs.” The drug giant also talked about the “enhanced pipeline development opportunities, premier global operations and the anticipated realisation of operational and financial synergies.”

In terms of sectors, the healthcare sector led U.S.-targeted M&A (mergers and acquisitions) in 2013 with a volume of $195 billion, Dealogic estimated. The pharmaceuticals industry has seen a wave of consolidation in the recent past, with Actavis (ACT) buying Forest Laboratories (FRX), Valeant’s (VRX) $45 billion bid to buy Allergan (AGN) after purchasing Bausch & Lomb last year, and Allergan itself preparing for a takeover of Shire PLC. Swiss drugmaker Novartis (NVS) and Britain’s GlaxoSmithKline entered into an asset swap deal valued at around $16 billion. Novartis is also selling its animal health division to Eli Lilly for approximately $5.4 billion.

Pfizer expects the transaction to result in the combination of the two companies under a new UK-incorporated holding company. It believes that synergies would be achieved through the combination of the two companies’ operations and that the combination would enable greater capital efficiency and a more efficient tax structure. We’ll discuss this in detail in the following parts of this series.