AstraZeneca’s (LSE: AZN) (NYSE: AZN.US) CEO, Pascal Soriot, is proving to be a great deal negotiator. He knows Pfizer (NYSE: PFE) needs Astra more than Astra needs Pfizer. Any bid lower than £60 a share for the British pharmaceutical behemoth shouldn’t be considered acceptable.
A bid at £60 a share
Such a price tag would represent a 20% premium to Pfizer’s second and latest proposal, which was rejected on 2 May. If Mr Soriot plays it right, it’ll be a great time to be on Astra’s shareholder register.
From early January, when the first bid was made, the pre-tax return of anybody holding Astra stock would be a whopping 67.5%. The FTSE 100 has yielded a pre-tax year to date return of 1.6%, excluding dividends.
At £50 per share, Mr Soriot didn’t budge – and rightly so.
Astra’s relative valuation, as gauged by the EV/Ebitda trading multiple, has swung from 15x in 2005 to 3.7x in May 2012, and stood at 7.5x before the first approach made by Pfizer in early January.
It doesn’t really matter whether Pfizer valued the target at $100 billion-plus and its bid already overvalued Astra by most metrics. For Pfizer — which reported downbeat first-quarter results on 5 May — Astra represents the ultimate deal to alleviate pressure on its stock price.
Tax Benefits
The take-out multiple shouldn’t bother Pfizer management. In fact, investors believe that Pfizer will bid up, with most analysts seemingly convinced that the deal will be wrapped at $55 per share.
The more time goes by, however, the more expensive the deal will become if Pfizer stock weakens further. It has already dropped by almost 4% in the last two trading sessions. Astra must be secured at almost any price to gain important tax benefits — the key attraction of the deal — and deploy offshore capital that otherwise, if repatriated, would be heavily taxed by the US government.
Pfizer must do something, and swiftly. The deal is pure financial engineering at its best in that it doesn’t promise hefty synergies — Pfizer has reassured the UK government on this front – and operational changes will take time to materialise as is always the case with multi-billion cross-border deals.
Mr Soriot should ask for more because Pfizer could go hostile, but it’s not in their interests, as the cash portion of the bid is only 32% of the total. Co-operation between the management at the two firms is of paramount importance.
Here We Go Again
In several ways, the deal resembles the Kraft/Cadbury saga that started in September 2009 and ended about six months later.
Kraft’s cash-and-stocks offer for Cadbury was significantly increased over time, a larger cash portion was offered, and Cadbury’s shareholders got a hefty payout. Similarly, Astra’s shareholders could find themselves on the right side of the trade.
At Pfizer, plan B entails stock buybacks and further divestments, which the market won’t easily digest after the promise of a transformational deal. Of course, Mr Soriot runs the risk of leaving his shareholders empty-handed — but that is a risk worth taking when American giants knock on doors.