Now that Pfizer (NYSE:PFE)'s Upjohn and Mylan (NASDAQ:MYL) are combining in a new spinoff, it looks like Teva (NYSE:TEVA) could be next. Judging by price movements in Teva since Pfizer made its move, some traders may be anticipating this. The stock is up nearly 7% since the deal was announced.
But buying Teva on the assumption of it being acquired is more risky than it looks, even at these levels. Here's why.
First, it can hardly be said that Pfizer and Mylan joining forces is good for Teva in any fundamental sense. The new company will have a healthier balance sheet, it will be more efficient, it will be in direct competition with Teva's market, and for shareholders it will pay a dividend immediately. Teva stopped paying dividends in 2017 and, bleeding cash, it doesn't look like it will restart payments any time soon. The only reasonable explanation for a 7% bump in Teva shares on the announcement is that traders really are expecting - or at least hoping and asking - for Teva to be acquired.
Second, Israel has a unionized labor culture, and strikes that can shut down the whole country for days are relatively common. Teva's job cuts back in 2017 prompted the country's relatively powerful unions to essentially shut down all public sector services in solidarity with Teva's unionized workers. Workers blocked roads and even threatened to blow up an entire factory in Jerusalem in protest against the cuts.
To get an idea of how extreme it got, then-head of Teva's workers' union Itzik Ben Simon had alerted news reporters that he was stockpiling explosives and poisonous materials in Teva's Jerusalem factory, and advised the "whole country should be on alert." He had also earlier threatened to stop distributing essential medicines. One month later, rather than being arrested for threatening public safety, the same person was negotiating severance pay with Teva. Point being, the Israeli government has been known to tolerate this sort of behavior, and any prospective Teva buyer is likely aware of this and will have it in mind if and when making any sort of offer.
Keep in mind, the previous unrest, as extreme as it was, was in the protest of job cuts. If Teva ever seriously considers being acquired, it could put many more Teva jobs in Israel at risk, and protests would likely be even more extreme than they were back in 2017.
Any company on the other end is going to have to deal with this, which could mean that any deal might be contingent on no cuts in Israel itself, or at least limited cuts. This could end up limiting Teva's value to any prospective buyer. As of last year, 11.5% of its work force is located in Israel, consisting of 4,983 workers (page 24).
Further, a buyer could simply wait for Teva's situation to get desperate enough that an acquisition would be absolutely necessary, rather than simply preferable. That means Teva's stock could fall further still before it is forced into this position. Teva is not in great shape, but it is not yet in existential danger.
If you're a bull on Teva and you think it can recover on its own, that's one thing. But to buy at these levels on the assumption of a takeover is more risky than it looks.
Disclosure: No positions.
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This article first appeared on GuruFocus.
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