Pfizer chasing AstraZeneca in potential $100-B deal

By Ben Hirshler, Reuters

Posted at Apr 28 2014 06:59 PM | Updated as of Apr 29 2014 02:59 AM

LONDON - U.S. drugmaker Pfizer Inc is working on its next move in a potential $100 billion bid battle for Britain's AstraZeneca Plc after having two bids rejected, as deal-making grips the healthcare industry.

Pfizer said on Monday it made a 58.8 billion pounds ($98.9 billion) bid approach to AstraZeneca in January and had contacted its British rival again on April 26 seeking further discussions about a takeover.

AstraZeneca shares jumped 15 percent on news of the latest takeover plan, which would be the biggest-ever foreign acquisition of a British company and one of the largest-ever pharmaceuticals deals.

The renewed approach comes amid a wave of mergers and acquisitions in the sector, as the industry restructures in the face of healthcare spending cuts and cheap generic competition.

In a statement, Pfizer said AstraZeneca had declined to engage in discussions on both occasions and the U.S. group was now considering its options. AstraZeneca urged its shareholders to take no action and said it remained confident of its independent strategy.

Pfizer's original proposal, made to the board of AstraZeneca on January 5, included a combination of cash and shares and would have valued AstraZeneca shares at 46.61 pounds each - a premium of around 30 percent at the time.

It gave no further details but AstraZeneca's statement said the proposal comprised 13.98 pounds in cash and 1.758 Pfizer shares for each AstraZeneca share.

Pfizer said it was now considering a possible transaction in which AstraZeneca shareholders would receive a significant premium above the value of their shares on April 17, before takeover rumors started.

Citi analyst Andrew Baum said he believed there was now a 90 percent chance that Pfizer would acquire AstraZeneca for at least around 49 pounds a share.

Shares in the British group shot up to 46.75 pounds by 0925 GMT on Monday, after touching an all-time high of 47.17.

Given that Pfizer is likely to have to offer more this time, due to a run-up in AstraZeneca shares since January, the final value of any deal could be above $100 billion.

Under British takeover rules, Pfizer has until May 26 to announce a firm intention to make an offer for AstraZeneca or back away.

INDEPENDENT FUTURE

Pfizer's declaration turns up the heat under AstraZeneca Chief Executive Pascal Soriot, who has been in the job since October 2012 and who made clear last week he saw an independent future for the group, flagging spin-offs of two non-core units as one option to create more value.

Soriot has been credited with reviving AstraZeneca's previously thin pipeline of new drugs, which is badly needed to offset a wave of patent expiries on older drugs.

However, his overhaul - including an ambitious plan to move the company's research and corporate headquarters to Cambridge, England - is still a work in progress and he has also come under from some shareholders over executive pay.

Buying AstraZeneca would give Pfizer a number of promising - though still risky - experimental cancer medicines known as immunotherapies that boost the body's immune system to fight tumors. It could also generate significant cost savings for the U.S. group.

Acquiring a foreign company also makes sense for Pfizer as it has tens of billions of dollars accumulated through foreign subsidiaries, which if repatriated would be heavily taxed.

Pfizer has a long track record of making major acquisitions. The $68 billion purchase of Wyeth in 2009 was its last major deal after earlier acquisitions of Pharmacia and Warner Lambert.

The drugmaker has more recently been divesting certain operations, while mega-mergers had fallen out of fashion in the pharmaceuticals industry following skepticism about how well some of them have worked.

HEFTY RETURN

But Chief Executive Ian Read said he was ready to consider large deals that made sense, adding that buying AstraZeneca would "maintain the flexibility for the potential future separation of our businesses".

The transaction would complement both Pfizer's innovative drug businesses and also its established products business - comprising older and off-patent medicines - which many analysts expect to be eventually spun off.

Tim Anderson, an analyst at brokerage Bernstein, said AstraZeneca shareholders could be happy with a deal that gave them a hefty financial return, but Pfizer's investors might have more mixed views about the wisdom of another very large deal.

In addition to using offshore cash, buying AstraZeneca would be tax-efficient since Pfizer could re-domicile to Britain and enjoy lower tax rates, thanks to attractive incentives to companies that manufacture and hold patents in the country.

Pfizer envisages combining the two drugmakers under a new UK-incorporated holding company, although the head office and stock market listing would remain in New York. But the suggested deal has triggered worries about jobs in Britain's drug sector, which is viewed as a key industry by the government.

AstraZeneca has already laid off thousands of staff as it shrinks its cost base to cope with a fall in sales due to patent losses on blockbuster medicines, while Pfizer has shuttered a research site in Sandwich, southern England.

However, Britain's finance minister George Osborne has indicated a hands-off approach to any deal, which he described on Friday as "a commercial matter between the companies".

Bank of America Merrill Lynch, JP Morgan and Guggenheim Securities are advising Pfizer.