The case for Pfizer's proposed takeover of AstraZeneca (Part 2 of 9)
Pfizer’s made its first offer to acquire AstraZeneca in January, offering £13.98 in cash (30%) and 1.758 Pfizer shares (70%) per AstraZeneca share, representing a value of £46.61 ($76.62) per AstraZeneca share based on the closing price of Pfizer shares of $30.52 on January 3, 2014. The offer represented a substantial premium of approximately 30% to AstraZeneca’s closing share price of £35.86 on January 3, 2014. AstraZeneca’s board rejected this proposal as undervaluing the company and also highlighting concerns regarding the proposed transaction structure, which contained a large proportion of the consideration in Pfizer’s shares. The board also raised certain concerns regarding the execution risks associated with the proposed inversion structure, as Pfizer would relocate to the UK for tax purposes.
Pfizer contacted AstraZeneca at the end of April and sent a revised takeover proposal on May 2 for AstraZeneca that represented an indicative value of £50.00 ($84.47) per AstraZeneca share. Pfizer’s increased proposal for AstraZeneca represented a substantial premium of 32% for AstraZeneca shareholders on the basis of Pfizer’s closing share price of $31.15 (and an exchange rate of $1.00:£0.5919) on May 1, 2014, and AstraZeneca’s closing share price of £37.82 on April 17, 2014. Under the deal, AstraZeneca shareholders would receive, for each AstraZeneca share, 1.845 shares in the combined entity and 1,598 pence in cash.
AstraZeneca has tried to assert its independence. It said that from 2017 to 2023, it’s targeting strong and consistent revenue growth, leading to annual revenues of greater than $45 billion by 2023. Operating leverage is expected to result in core earnings growth in excess of revenue growth during this period. But analysts consider AstraZeneca’s estimates to be too optimistic, as there’s no guarantee as to whether the products in its pipeline will perform as forecasted. Moreover, AstraZeneca faces competition from GlaxoSmithkline for its asthma drug benralizumab and is lagging behind Bristol-Myers Squibb (BMY), Merck & Co (MRK), and Roche (RHHBY) in the upcoming immuno-oncology space. Analysts expect AstraZeneca’s shares to fall if Pfizer walks away from the deal.
In a recent update, Pfizer said its business model with distinct innovative and established pharmaceutical businesses provides an opportunity to optimize AstraZeneca’s complementary portfolios. The combined business is expected to have the financial strength and stable pro forma cash flow essential to support continued investment in science and innovation while driving shareholder value. It outlined the challenges faced by a standalone AstraZeneca, which included an uncertainty of revenue potential—attractive but high-risk early stage pipeline that still requires significant investment. Pfizer also said AstraZeneca’s business faces competitive commercial dynamics that require significant investments while its top line is being pressured by a major loss of exclusivity. Moreover, Pfizer believes its British rival lacks sufficient scale to compete against large national players in emerging markets.
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