Investors eye Pfizer mega-deal

Ian Read, chief executive officer of Pfizer Inc., leaves Portcullis House after giving evidence to Parliament's Business, Innovation and Skills Select Committee in London, U.K., on Tuesday, May 13, 2014. Read began trying to convince U.K. lawmakers today his company's offer for AstraZeneca Plc is good for the British economy as he seeks to persuade his target to enter talks. Photographer: Simon Dawson/Bloomberg *** Local Caption *** Ian Read

Ian Read, chief executive officer of Pfizer Inc., leaves Portcullis House after giving evidence to Parliament's Business, Innovation and Skills Select Committee in London, U.K., on Tuesday, May 13, 2014. Read began trying to convince U.K. lawmakers today his company's offer for AstraZeneca Plc is good for the British economy as he seeks to persuade his target to enter talks. Photographer: Simon Dawson/Bloomberg *** Local Caption *** Ian Read

Published May 24, 2015

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New York - Pfizer built itself into a $212 billion (R2.5 trillion) behemoth by spending more money on acquisitions than any other drugmaker in the world. Still, Pfizer’s next purchase is what will really leave its mark as a dealmaker.

The company may be plotting its biggest purchase yet to solve its biggest gripe: taxes.

It pays a higher rate than most of its rivals, and chief executive Ian Read has made it clear he wants to change that.

It made a failed run at AstraZeneca last year in what would have been a $120bn tax-inversion deal.

As speculation about a deal mounts again, analysts last week began picking their top takeover candidates.

They centred on GlaxoSmithKline, AstraZeneca and Shire.

And if you ask Mylan, it’s also on the list.

The executive chairman was said to have told shareholders last week that Pfizer could buy his firm after Mylan bought Perrigo.

Any one of those deals may enable Pfizer to move its legal address to a place such as the UK, where corporations have a lower tax burden.

Some of its rivals have already done this and it’s led to a greater ability to access their overseas cash stockpiles and eke out more profit for investments or shareholder payouts.

 

Deal benefits

“Subject to price, there are a lot of merits to a deal like that,” said Colin McWey, a fund manager for Heartland Advisors.

In addition to the tax benefits, a deal would give Pfizer more lucrative products and a way to cut costs. And now may be the time to do it before borrowing rates climb and the best targets get picked off.

The pharmaceutical industry has been on a merger and acquisition (M&A) spree, so targets are getting more and more expensive.

Many transactions were structured as tax-inversion deals, which have drawn increasing scrutiny from the US Treasury Department since Pfizer bid for AstraZeneca a year ago.

In September, the Treasury Department announced new rules to clamp down on inversions.

While the changes do reduce some benefits, they don’t eliminate them or make doing them impossible.

Read said in October that he saw “no reason” why the company would not be able to do an inversion if it found an attractive opportunity.

Joan Campion, a spokeswoman for Pfizer, said the New York-based company did not comment on speculation.

When asked about M&A and inversion plans on an earnings call last month, Read stressed that creating shareholder value was what guided his dealmaking.

In February, the company announced a takeover of Hospira for $16.8bn, including net debt.

Through that deal, it gains generic injectable drugs and devices to deliver them, bolstering its established-products division.

That part of Pfizer, which comprises drugs that have lost or are going off patent protection, may eventually be spun off.

“We believe that other significant acquisitions are possible, though more likely to be aimed at” Pfizer’s innovative-pharma side of the company, Jeffrey Holford, an analyst for Jefferies Group, wrote in a report on Thursday.

He cited Shire as that type of candidate.

Shire, valued at $52bn, makes treatments for neurological disorders such as attention deficit hyperactivity and rare diseases such as Hunter syndrome.

Perrigo, the maker of over-the-counter drugs that received an unsolicited bid from Mylan, could also be attractive to Pfizer, Holford wrote.

Both companies’ tax jurisdictions are in Dublin.

 

Urgency

Deutsche Bank’s Gregg Gilbert highlighted Glaxo in a report this week that said Pfizer might feel a sense of urgency to boost shareholder value by leveraging its balance sheet and doing a “needle-moving” transaction.

Glaxo would be the largest of the likely targets at $111bn.

It would diversify Pfizer’s vaccine and consumer portfolios while doubling and quadrupling each of those revenue bases, respectively, Gilbert wrote.

Pfizer could always make another attempt at buying AstraZeneca.

The UK company’s stock has risen just 2.2 percent since it spurned Pfizer last May, underperforming most of its competitors.

Any deal may be a precursor to an eventual break-up.

The company said it might explore a split in which its established-drugs unit gets spun off or sold.

That means multiple deals may be on the way. – Bloomberg

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