AstraZeneca turns down a sweeter deal

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Ben Hirschler London

Drug maker Pfizer increased its offer for AstraZeneca to £63 billion (R1.112 trillion) on Friday, but the British company promptly rejected the proposal to create the world’s biggest pharmaceutical company.

AstraZeneca’s board said the offer undervalued the company “substantially” and was not an adequate basis on which to engage with its suitor.

Industry analysts and investors said that raised the possibility that Pfizer would now take the takeover plan direct to AstraZeneca shareholders.

The US group would much prefer an agreed deal, since hostile takeovers typically take longer, result in a higher final price and carry more risks because the bidder cannot access the target’s books to assess its business.

One AstraZeneca investor said Pfizer management had made it clear in meetings this week that it wanted a friendly deal but it was determined to the see the transaction completed and a hostile bid was a potential “tool”.

While Pfizer has given assurances to the British government on retaining drug research in Britain, a spokesman for Prime Minister David Cameron said AstraZeneca’s fate would be determined by shareholders, not the state.

Friday’s £50-a-share indicative offer followed the decision by AstraZeneca to rebuff an earlier proposal that valued it at £58.8bn, or £46.61 share.

Some investors and analysts had expected that the sweetened offer would be enough to bring AstraZeneca’s board to the negotiating table, even if it was not accepted, and the swift rejection suggests Pfizer may now go over the board’s head.

“It’s making it increasingly likely that Pfizer is going to come back with a hostile bid,” said Mick Cooper, analyst at Edison Investment Research.

Leading investors met Pfizer chief executive Ian Read in London last week and some feel that an offer of £50 or above is certainly worth discussing.

“Given where the shares have come from, this doesn’t look unreasonable,” one of AstraZeneca’s 10 largest shareholders said of the latest Pfizer offer. AstraZeneca shares were trading at about £30 a year ago, but confidence in its cancer drug pipeline has built up strongly since then.

“We expect Pfizer ultimately to have to sweeten its offer based on discussions we have had with investors, many citing a price within the £52 to £55 range and some above this,” said Mark Clark, an analyst at Deutsche Bank.

Clark also cited Deutsche Bank’s analysis of the earnings per share accretion for Pfizer.

Investors had previously said they were looking for at least £50 a share and also wanted more cash in the mix. The new offer would have given them 32 percent cash and 68 percent shares, little different from the original 30-70 split.

Pfizer’s latest proposal would have seen shareholders receiving, for each AstraZeneca share, 1.845 shares in the combined company and £15.98 in cash.

Many analysts are convinced Pfizer will raise its offer again, not least because it wants to get the deal done before any possible change in US tax rules that might prevent it moving its tax base to Britain.

Commenting on the offer, AstraZeneca chairman Leif Johansson said: “Pfizer’s proposal would dramatically dilute AstraZeneca shareholders’ exposure to our unique pipeline and would create risks around its delivery.”

He also highlighted the fact that the small cash component would leave investors exposed to the risks faced by Pfizer in executing an ambitious mega-merger.

Disappointment

Shares in the British group slipped back 0.15 percent to £48.08 by late on Friday. The stock gained ground in late trading on Thursday and there was some disappointment that the cash component had not increased more.

The takeover plan has stirred political controversy in Britain. In an attempt to smooth relations with the government, Read wrote to Cameron promising to complete a substantial new research centre planned by AstraZeneca in Cambridge and to retain a manufacturing plant in Macclesfield. – Reuters


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