Don’t Bank On An AstraZeneca plc Bid Windfall

AstraZeneca plc (LON:AZN) might be taken over but rival GlaxoSmithKline plc (LON:GSK) has just done a better deal.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in AstraZeneca (LSE: AZN) (NYSE: AZN) are currently up around 7% on weekend reports that Pfizer made a tentative bid approach. The newspapers are full of speculation while the City’s scribblers enthuse over the scope for costs savings, the potential of Astra’s oncology pipeline to reverse Pfizer’s declining sales, and the tax efficiency of the US company spending money that has never touched home shores.

The known unknowns

But hang on! Just when did this approach take place? The Sunday Times, which broke the story, said informal talks have taken place ‘in recent weeks’. But the Financial Times said they took place last year and have since ended. So why has the news come out now? We’ll never know, just as we’ll never know the identity of the ‘senior investment bankers’ who spoke to the Sunday Times. But a £3bn overnight movement in AstraZeneca’s market value is testimony to the significance of that conversation.

Amidst all the speculation, two things are certain. One is that there is always a lot more talk about mega-mergers than actual, concrete deals. Buying shares in the hope of a much talked-about deal coming off is a risky strategy. Vodafone shareholders are still waiting for AT&T to make its return call: meanwhile Voda’s shares have drifted by 14% since the share consolidation, as the bid premium evaporates.

Secondly, if the FT‘s timing is accurate, then Astra’s shares were 20-25% cheaper when the talks took place. That quite changes the arithmetic for Pfizer’s M&A department.

High-yield biotech

So it makes sense to take a step back and look at Astra’s fundamental value. I have previously described the company as a high-yield biotech play. CEO Pascal Soriot is pursuing an R&D-led strategy to develop new drugs to replace blockbusters rapidly coming off-patent. He adopted a flexible dividend policy to maintain cover ‘over the business cycle’ allowing Astra to carry on paying a fat yield — currently 4.7% — but dependence on the success of its scientists gives it the characteristics of a speculative biotech play.

Astra’s shares have climbed a wall of confidence in the past six months, as investors seized on promising pipeline developments. Having been at a discount of 20-30%, Astra’s shares are now on a similar P/E to sector peer GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and yield less than GSK’s 5.1%. 

Like Astra, only better

But GSK retains the defensive characteristics of a classic pharma share. Its diversified business model, including over-the-counter healthcare and vaccines, reduces reliance on scientific success. It has just announced a deal that further de-risks and diversifies its business model, selling its oncology business to Novartis whilst buying the latter’s vaccines and consumer healthcare businesses.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Tony owns shares in GlaxoSmithKline and Vodafone but no other shares named in this article. The Motley Fool has recommended shares in GlaxoSmithKline.

 

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »