The shares of AstraZeneca (LSE: AZN) (NYSE: AZN.US) trade well above fair value — and that’s become even more apparent this week.
AbbVie Bids For Shire
AbbVie (NYSE: ABBV.US)’s latest cash-and-stock proposal for Shire (LSE: SHP) indicates that Astra shareholders still hoping to receive a Pfizer (NYSE: PFE.US) bid — and one largely financed by cash — will likely end up being disappointed.
Along with the take-out price, the cash component of Pfizer’s latest proposal for Astra, which was rejected in late May, turned out to be the sticking point in the Pfizer/Astra saga. The cash portion was simply too low to convince Astra management to engage with Pfizer.
Hostile Takeovers
In deal-making, hostile takeovers heighten execution risk for the acquirer, yet Pfizer may decide to approach Astra shareholders by the end of the year. Astra stock is essentially flat since takeover talk vanished. Either way, Astra shareholders won’t get the deal they had hoped for, in my view. If Pfizer agrees to pay up — say, £60 for each Astra share — it will offer more than 50% of the purchase price in its own stock to finance the transaction.
Incidentally, there’s also a chance that Pfizer will look elsewhere to secure a “tax-inversion” deal. Hence, Astra offers little upside right now.
AbbVie/Shire: A Benchmark Deal?
The final stock/cash split that eventually emerges from the AbbVie/Shire deal will be a benchmark for large transactions in the pharmaceutical world.
Shire said on Monday that it was willing to recommend a £31bn proposal from AbbVie. The US company’s revised proposal stands at £53 per share, and includes a £24 cash portion, while the reminder is represented by AbbVie shares. AbbVie is willing to pay only 45% of the full price in cash. A firm offer has yet to be made but, should it emerge, it will likely carry a similar cash/stock split.
On 19 May, the board of Astra rejected Pfizer’s final proposal, which comprised “£24.76 in cash (45%) and 1.747 Pfizer shares (55%)” for each Astra share, for a value of £55 per Astra share based on the closing price of Pfizer shares on 16 May.
Mating Game
Pfizer stock has gone nowhere since the American company decided to walk away. If Astra executives are right, and their long-term projections are flawless, Astra shareholders will be rewarded without Pfizer. That’s unlikely, in my view.
Pfizer needs Astra more than Astra needs Pfizer, but Astra stock now trades well above fair value, and still prices in an M&A premium. If Pfizer doesn’t make a comeback with a blown-out offer, Astra shareholders will be the ultimate losers.
Elsewhere, there are striking similarities between some financials reported by Astra in 2000 and its trailing figures for the 12 months ended on 31 March 2014. Of course, Astra has changed over the years, but back then its stock traded at around £36. The unaffected share price of Astra was about £36 in early January, too. Value will be delivered only if a takeover emerges, and it may not be on very convenient terms….
