Shire SHPG has issued a press release confirming its proposal (made on Jul 10, 2015) to acquire Baxalta Inc. BXLT in an all-stock transaction of approximately $30 billion.
According to the terms of the deal, Baxalta shareholders will receive 0.1687 Shire ADRs in exchange of each Baxalta share, i.e., a value of $45.23 per Baxalta share. Shire’s proposition represents a premium of 36.4% over Baxalta’s stock price as of Aug 3, 2015. Baxalta shareholders would own approximately 37% of the combined Shire group.
We remind investors that Baxalta was formed through a spin-off from Baxter International Inc. BAX in Jul 2015.
Why Shire is interested?
Shire stated that the proposed acquisition of Baxalta will generate shareholder value immediately and help expedite the growth trajectory. It already has a strong presence in the market for innovative therapies for rare diseases and other specialty conditions, and expects to leverage Baxalta’s expertise and resources to create a leading global biotech company in the field of rare diseases.
According to Shire, the combined entity is expected to generate double-digit top-line growth and enjoy substantial operating synergies. It is expected to deliver product sales of $20 billion in 2020. It will also be positioned to earn sustainable returns including an internal rate of return in excess of 10%. Shire also stated its intention to initiate a share buyback program to repurchase up to 13% of the combined post-transaction outstanding shares within two years.
Moreover, Shire believes that the deal will be accretive to earnings per share after one year from the date of acquisition.
Baxalta’s Refusal
However, Baxalta stated that Shire’s proposal is not in its interests or that of its shareholders since the proposal significantly undervalues the company’s prospects for growth and value creation. According to Baxalta, being a new publicly-traded company, its stock has yet to achieve a price level that suitably reflects the company’s value and prospects.
The company is of the opinion that its merger with Shire will generate enough of neither operational nor revenue synergies to lead to potential value creation for its shareholders.
Meanwhile, Shire has decided to directly approach Baxalta’s shareholders. While Baxalta’s shares were up 11.9% on the proposed acquisition, Shire’s shares fell 5.4% on the news.
Our Take
Shire has been quite active on the acquisition front over the past year. Earlier this week, Shire acquired privately held Foresight Biotherapeutics Inc. for $300 million. With this acquisition, Shire strengthened its late-stage pipeline by obtaining the global rights to FST-100, a late-stage candidate being developed for the treatment of infectious conjunctivitis. In Feb 2015, Shire acquired NPS Pharmaceuticals. It helped the company to gain access to NPS Pharma’s portfolio and leverage its market expertise in gastrointestinal disorders, along with its core capabilities in rare disease patient management.
In this context we also note that, several companies in the health care sector have been taken by the spree of merger and acquisition. Currently, generic drug-maker Mylan MYL intends to acquire Perrigo Company plc PRGO. On Jul 29, 2015, the European Commission granted regulatory clearance to the company under the European Union Merger Regulation for its proposed acquisition of Perrigo.
Shire carries a Zacks Rank #3 (Hold). Perrigo is a better-ranked stock carrying a Zacks Rank #2 (Buy).
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