) shares soared 12.16% after a statement was released by
) confirming that it had discussions with the former regarding a
possible merger. Pfizer confirmed that in Jan 2014, it had
submitted a preliminary, non-binding and conditional proposal
regarding a possible offer for AstraZeneca.
Pfizer's proposal valued AstraZeneca at £46.61 (approximately
$76.62) per share (comprising 30% - £13.98 in cash and 70% -
1.758 Pfizer shares). Although the deal represented a premium of
approximately 30% (to AstraZeneca's closing price on Jan 3, 2014
- £35.86), AstraZeneca's Board rejected the proposal on grounds
that it significantly undervalued the company.
Apart from that, the company also raised certain concerns
regarding the transaction structure (low proportion of cash, high
proportion of Pfizer shares) and risks related to the proposed
inversion structure (Pfizer's intention to redomicile to the UK
for tax purposes).
The Way Things Stand Now…
A few days back, Pfizer had again contacted AstraZeneca to renew
merger discussions. AstraZeneca again declined and currently
Pfizer is evaluating its options. If the deal goes through, it
will lead to the formation of a new company incorporated in the
UK and with head offices in New York. The company will be listed
on the NYSE.
The potential transaction will be governed by the UK takeover
code, which requires Pfizer to announce a firm offer on or before
May 26, 2014. Pfizer is set to report its first quarter 2014
results on May 5. We expect to gain more visibility on the deal
terms if and when Pfizer makes the offer.
What's in It for Pfizer?
Pfizer expects the potential merger to be accretive to its
earnings (in the first full year following the merger) and
accelerate its earnings growth pace. Apart from that, the company
expects to realize significant operational synergies benefiting
from better capital efficiency and a more efficient tax
The potential deal would also boost Pfizer's cardiovascular,
immunology and inflammation and oncology portfolios. The
AstraZeneca merger would be advantageous in both the established
pharmaceutical market (where it can get critical mass for market
access and cost efficiencies) and growing emerging markets (by
augmenting Pfizer's presence there).
However, we note that AstraZeneca has been struggling with a
number of patent expiries. Earnings have also seen a declining
trend in the past several quarters. For 2014, the company expects
core earnings to decline in the teens. Its acid reflux management
drug, Nexium, which generated $3.9 billion sales in 2013, is set
to go off-patent in late May this year.
AstraZeneca currently hold a Zacks Rank #3 (Hold), while Pfizer
carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the
health care sector include
Johnson & Johnson
). Both sport a Zacks Rank #2 (Buy).
ALLERGAN INC (AGN): Free Stock Analysis
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