AstraZeneca on Monday rejected Pfizer's "final proposal" buyout offer of $117 billion. Shares of the British drug giant dived as investors seemed to lose hope that the merger of titans would ever take place.
Pfizer (PFE) first revealed on April 28 that AstraZeneca (AZN) had rejected a proposal early this year, and a few days later made a higher bid of 50 British pounds per share, or about $106 billion.
AstraZeneca turned Pfizer down again, saying the price was too low and that the offer contained too much stock, at 67%. Both AstraZeneca's management and many Brits were also worried, based on some of Pfizer's past acquisitions, that it was going to slash British research and development staff after gaining the tax benefits of a move across the Atlantic. Pfizer CEO Ian Read made a series of pledges to the U.K. government to preserve certain jobs and resources in Britain.
On the other side of the pond, President Obama and other U.S. political leaders have been pushing legislation against the sort of tax-inversion acquisitions that Pfizer is attempting — buying a firm in a lower-tax foreign country to get an official domicile there. Several specialty drug takeovers have involved U.S. companies redomiciling in even-lower-tax Ireland.
Under British law, Pfizer had until May 26 to make another bid, after which it couldn't make another one for six months unless AstraZeneca agreed to negotiate. On Sunday, Pfizer announced that an offer of 53.50 pounds a share had been rejected the previous Friday, so the company made its "final proposal" at 55 pounds, 45% of it cash. On Monday, AstraZeneca said no yet again, saying that Pfizer's new offer is about 10% too low.
Takeover Bid Mostly Dead
Pfizer said that it won't go hostile, leading to much discussion on Wall Street as to whether AstraZeneca's cold shoulder finally kills its hopes.
AstraZeneca shares fell 12% to 70.63, giving up much of its recent gains on takeover talks.
Morningstar analyst Damien Conover wrote in a research note Monday that the odds of a deal are now well below 50%.
"We are surprised by Astra's rejection, as we believe the offer not only rewards Astra for its current valuation, but also gives Astra shareholders a majority of the benefits from the expected merger-related cost savings," he wrote. "While Astra has until May 26 to engage with Pfizer, we believe its disagreement on valuation is likely to derail the merger.
Analyst Mark Schoenebaum of ISI Group still held out some hope that shareholder pressure would drive AstraZeneca back to the bargaining table.
"Our risk arb desk notes that: (1) AZN dropped the words 'significantly' and 'substantial' from the 'significantly undervalues' and 'substantial shortfall' language the company used in the prior rejections including the GBP53.50 proposal on Friday; and (2) the word 'unanimous' is not contained in AZN's description of the BoD (board of directors') rejection," Schoenebaum wrote in an email to clients Monday. "Our desk believes it's now in AZN shareholders' hands and that this is effectively a 'hostile' tender offer.
Astra Sees Growth — In 2017
AstraZeneca has been working hard to get shareholders excited about its long-term prospects to overcome its recent weak financials, which are due to patent losses and soft drug launches. On May 7, the company set a revenue target of $45 billion by 2023, nearly double its current 12-month sales. However, it also admitted that the growth isn't really going to start until 2017.
The general opinion on the Street seems to be that the current offer is about as high as Pfizer can go and still get a return for its own shareholders. Deutsche Bank analyst Mark Clark wrote in early May that 55 pounds a share is the appropriate price.
That opinion was shared by Leerink's Seamus Fernandez, who downgraded AstraZeneca to neutral on Sunday after Pfizer announced its final offer. He wrote that even in a bull scenario — in which AstraZeneca gets seven cancer drugs approved and cuts $1.2 billion from its sales, general and administrative expenses — the offer fully values the company.
Nonetheless, Schoenebaum wrote that Pfizer "certainly has the financial ability to raise the price 10%," and that its view of AstraZeneca's peak sales potential might be higher than consensus.
Pfizer investors, however, seemed at least a little relieved that the drug giant likely won't spend the money. Its stock rose less than 1% Monday to 29.28.