Last Friday, I explained why I thought Shire (LSE: SHP) (NASDAQ: SHPG.US) shareholders should sell their shares, regardless of the possibility of an increased bid from US pharma firm AbbVie.
Earlier today, AbbVie did submit a raised bid — so was I wrong?
I still say sell
AbbVie’s raised bid is for £22.44 in cash and 0.8568 AbbVie shares for each Shire share. This equates to around £51 at today’s exchange rates.
The offer is an 11% increase on the previous £46 proposal, but interestingly, Shire’s share price has not budged following the news — indeed, as I write, Shire share price has started to fall, and is now down by 3% on this morning’s opening price.
What’s happening?
AbbVie claims to have “met with, or spoken to” Shire shareholders who represent the majority of Shire’s outstanding shares.
However, the fact that Shire’s share price has fallen following the new offer seems to suggest that the City doesn’t expect Shire’s management to take up the offer, increasing the chances that the bid will fall through by the 18 July deadline.
Indeed, having looked at the details of the offer, I can see several problems with AbbVie’s new bid, which could explain the market’s lack of interest.
Not enough cash
Although this deal would have tax advantages for AbbVie, it might not do for Shire’s largest, long-term shareholders, who could face substantial capital gains tax bills.
Less than half the offer is in cash, so large UK shareholders would also be left with a big pile of AbbVie’s US-listed shares. In many cases, UK funds would be forced to sell these US shares straight after the deal went through, which would depress the price of AbbVie shares, reducing the real value of AbbVie’s offer.
Private shareholders in the UK would experience the same problems, and would face US share dealing and foreign exchange costs, too.
In my view, it seems fair to say that the true value of AbbVie’s revised offer, to most shareholders, is likely to be much less than £51.
Challenging valuation
A second problem is that Shire’s current share price places a seriously ambitious valuation on Shire’s business — around 23 times 2014 forecast earnings.
Shire shares trade at a premium of more than 20% to their pre-bid price, and have risen by 450% since 2009. For most shareholders, I think it’s time to take profits, de-risk, and sell — because Shire shares could plummet if the AbbVie bid fails.