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

White female supervisor working at an oil rig
Investing Articles

Could the UK general election be bad news for this FTSE 250 energy producer?

The country is due to vote in the general election on 4 July. Our writer looks at the possible implications…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should we buy cheap FTSE 100 shares now, before it’s too late?

The FTSE 100 is up 5% so far in 2024 and hit an all-time high in May. That means the…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Here’s why I think the Lloyds share price could hit a 5-year high in 2024

It's up 13.5% so far in 2024, and reaching new highs. But where might the Lloyds Bank share price go…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

If I’d put £15k into this FTSE 250 stock in 2008, I’d have over £1.26m today

This multi-billion-pound business has created plenty of millionaires over the last 16 years, but can it repeat this performance?

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

3 dividend shares I’ve bought for the next decade!

I think these UK dividend shares can amplify my long-term passive income, and could even be on track to becoming…

Read more »

Investing Articles

If I’d put £5,000 in Scottish Mortgage shares at the start of 2024, here’s what I’d have now

Scottish Mortgage shares have staged a recovery lately, powered by the public and private growth stocks held in the portfolio.

Read more »

Happy couple showing relief at news
Investing Articles

9.9% dividend yield! Is this FTSE 100 stock a brilliant bargain?

This leading British enterprise looks like a delicious deal for passive income, trading at a low multiple while offering a…

Read more »

Investing Articles

If I’d put £5k in a FTSE 100 tracker fund 5 years ago, here’s what I’d have now

Investing in a FTSE 100 index fund is a terrific way to start building wealth passively with minimum effort. But…

Read more »