AstraZeneca’s (AZN) shares soared 12.16% after a statement was released by Pfizer (PFE) confirming that it had discussions with the former regarding a possible merger. Pfizer confirmed that in Jan 2014, it had submitted a preliminary, non-binding and conditional proposal regarding a possible offer for AstraZeneca.
Pfizer’s proposal valued AstraZeneca at £46.61 (approximately $76.62) per share (comprising 30% – £13.98 in cash and 70% – 1.758 Pfizer shares). Although the deal represented a premium of approximately 30% (to AstraZeneca’s closing price on Jan 3, 2014 – £35.86), AstraZeneca’s Board rejected the proposal on grounds that it significantly undervalued the company.
Apart from that, the company also raised certain concerns regarding the transaction structure (low proportion of cash, high proportion of Pfizer shares) and risks related to the proposed inversion structure (Pfizer’s intention to redomicile to the UK for tax purposes).
The Way Things Stand Now…
A few days back, Pfizer had again contacted AstraZeneca to renew merger discussions. AstraZeneca again declined and currently Pfizer is evaluating its options. If the deal goes through, it will lead to the formation of a new company incorporated in the UK and with head offices in New York. The company will be listed on the NYSE.
The potential transaction will be governed by the UK takeover code, which requires Pfizer to announce a firm offer on or before May 26, 2014. Pfizer is set to report its first quarter 2014 results on May 5. We expect to gain more visibility on the deal terms if and when Pfizer makes the offer.
What’s in It for Pfizer?
Pfizer expects the potential merger to be accretive to its earnings (in the first full year following the merger) and accelerate its earnings growth pace. Apart from that, the company expects to realize significant operational synergies benefiting from better capital efficiency and a more efficient tax structure.
The potential deal would also boost Pfizer’s cardiovascular, immunology and inflammation and oncology portfolios. The AstraZeneca merger would be advantageous in both the established pharmaceutical market (where it can get critical mass for market access and cost efficiencies) and growing emerging markets (by augmenting Pfizer’s presence there).
However, we note that AstraZeneca has been struggling with a number of patent expiries. Earnings have also seen a declining trend in the past several quarters. For 2014, the company expects core earnings to decline in the teens. Its acid reflux management drug, Nexium, which generated $3.9 billion sales in 2013, is set to go off-patent in late May this year.
AstraZeneca currently hold a Zacks Rank #3 (Hold), while Pfizer carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the health care sector include Allergan (AGN) and Johnson & Johnson (JNJ). Both sport a Zacks Rank #2 (Buy).
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