(Bloomberg Opinion) -- It raised $3.5 billion from the stock market in March, only for its market value to dwindle by almost $8 billion. AstraZeneca Plc’s first-ever stock sale has been a painful experience. It could become an unwelcome deterrent to other companies that ought to do the same.
The British drugmaker was exploiting its strong share price to get its financial house in order. It has the highest valuation of all major European pharmaceutical stocks – roughly 22 times estimated earnings – thanks to the attractiveness of its drug pipeline. But that is all about the future. Right now, its free cash flow isn’t enough to cover the dividend without some help from disposals. The company can’t borrow much more without putting its investment-grade credit rating at risk.
When the chance came to buy into a new cancer treatment developed by Japan’s Daiichi Sankyo Co. Ltd., the British company needed to find $675 million to cover the first of several payments that could total as much as $6.9 billion over the coming years. Borrowing in dribs and drabs to foot the staggered bill would stretch the company to the limit. Better, then, to place some new shares with investors. While it was about it, the drugmaker could also raise a bit extra to cover the second payment on the Daiichi deal as well as a $1.6 billion bond maturing in 2020.
The result is that net debt this year will be about 1.6 times Ebitda instead of almost two times. That’s still higher than the peer group average of one.
It’s not the first time a company has used a strong share price to solve a financial problem. The remedy is often to buy another company using stock and import its healthier cash flows – think of Aviva Plc’s 2014 purchase of rival life insurer Friends Life. Selling shares for this amount of straight cash is unusual.
Add the money raised in the stock sale to AstraZeneca’s market capitalization just before the deal was announced and you get $111 billion. Today, AstraZeneca is worth $100 billion. Granted, pharma stocks have fallen over the period – but AstraZeneca has underperformed badly. At least investors who bought the discounted stock in the placing have done slightly better than the pharma sector.
The shares sold were equivalent to a little more than a month’s average trading volume. That ought to have been digestible. One explanation for the market heartburn is that daily volumes may mask a lot of activity by robots and overstate appetite for a stock from real investors. If that’s the case, the drugmaker simply flooded the market.
The more plausible explanation is that AstraZeneca has unwittingly sent a signal that it thinks its shares are overvalued and drawn attention to its strained finances. Analysts at UBS, concerned about AstraZeneca cash flow generation, think the company is worth 54 pounds a share. On Tuesday, the stock was trading at about 58 pounds.
The alternatives might well have been more painful. Taking on more debt to fund the Daiichi deal would have made investors even more nervous. Cutting the dividend – which costs $3.6 billion a year – would have triggered a revolt. None of the available remedies come without the awkward side-effect of hurting the share price.
Raise money when you can. It’s patently easier said than done. AstraZeneca’s experience shouldn’t undermine that argument.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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