Pfizer - Allergan: Will This Deal Happen?
By Aseem Rastogi | October 30, 2015AAA |
The question for investors is: Will this deal happen?In my opinion, yes, this deal with likely happen.
The parties say they are in friendly talks, which is a good start. The biggest single obstacle is price, of course. Pfizer Inc. (PFE) may have made a tactical misstep when it didn’t raise the bid for AstraZeneca (AZN) in 2014. Will Pfizer therefore be more accommodating in how much they are willing to pay for Allergan PLC (AGN)? Possibly.
I ran my earlier accretion/dilution math using an AGN price of $381/share, a 30% premium to yesterday’s price. But, as is obvious, the price of AGN a mere three months ago was nearly $340/share, and a 30% premium on that price would be $440/share. There could be creative ways to address a disparity between the "bid" and the "ask," such as using a CVR tied to the continued ability to invert. In my earlier merger math at $381/share, the averageEPS accretion to PFE was around 8% (with out-year accretion of 14%). If I have to step up the price to the midpoint of $381 and $440 (which averages to $410), the accretion drops from 8% to 5% (with out-year accretion of 10%), keeping all else equal.
WHAT WILL BE THE LIKELY DEAL STRUCTURE?
As I said in my earlier analysis, it would likely be an all-share transaction. This is because as long as AGN shareholders own more than 40% of the value of the combined entity, then the proposed changes in the Treasury “letter” from September 2014 don’t apply, and PFE then gets full tax relief. An all-stock deal is why the accretion to PFE’s EPS is not higher.
WHAT ABOUT SHARE BUYBACKS?
This is essentialto make the math work. Already in my accretion/dilution model, I assume hefty share buybacks – but are they hefty enough? On top of the $6-8 B/yr I had already been assuming for PFE’s stand-alone buybacks, I add between $2-5B/yr coming from AGN’s cash flows (with the remaining cash flows going to support the dividend on newly-issued shares that assumes no dividend cut), and I also add $34B in buybacks coming from the cash AGN receives from selling its generics business to Teva. (I spread this evenly over the first two years post deal closure.)
Summed, this is currently $91B in buybacks over a 5-year period. A big and important question is this: could PFE do even more? It does have a trapped pile of cash overseas, and once it “inverts” it will be able to access this without as much of a tax burden. If I I have to assume an additional $20B in buybacks over 5 years (bringing the total from $91B to $111B), my average EPS accretion rises from 8% to 13% (with out-year accretion of 20%), keeping all else equal.
WILL BRENT SAUNDERS RUN THE NEW COMPANY?
This often comes up as a natural succession plan, but rarely, if ever, has PFE taken outside talent and immediately put them in charge of the company, at least in the CEO spot. I think a better question is this: if Saunders makes $100M+ on the transaction, would he even want to run a big, messy global drug company, with all of the headaches it entails? Or, would he rather move onto something a little leaner and meaner? PFE has said a split in 2017 might get pushed back further if a big M&A transaction occurred. If so, does Saunders sit idly by until 2018?
My belief is that Saunders is not likely to block a deal if he isn't promised the CEO spot
Read more: Pfizer - Allergan: Will This Deal Happen? (PFE,AGN) http://www.investopedia.com/article...r-allergan-will-deal-happen.asp#ixzz3q9ehekZM
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By Aseem Rastogi | October 30, 2015AAA |
The question for investors is: Will this deal happen?In my opinion, yes, this deal with likely happen.
The parties say they are in friendly talks, which is a good start. The biggest single obstacle is price, of course. Pfizer Inc. (PFE) may have made a tactical misstep when it didn’t raise the bid for AstraZeneca (AZN) in 2014. Will Pfizer therefore be more accommodating in how much they are willing to pay for Allergan PLC (AGN)? Possibly.
I ran my earlier accretion/dilution math using an AGN price of $381/share, a 30% premium to yesterday’s price. But, as is obvious, the price of AGN a mere three months ago was nearly $340/share, and a 30% premium on that price would be $440/share. There could be creative ways to address a disparity between the "bid" and the "ask," such as using a CVR tied to the continued ability to invert. In my earlier merger math at $381/share, the averageEPS accretion to PFE was around 8% (with out-year accretion of 14%). If I have to step up the price to the midpoint of $381 and $440 (which averages to $410), the accretion drops from 8% to 5% (with out-year accretion of 10%), keeping all else equal.
WHAT WILL BE THE LIKELY DEAL STRUCTURE?
As I said in my earlier analysis, it would likely be an all-share transaction. This is because as long as AGN shareholders own more than 40% of the value of the combined entity, then the proposed changes in the Treasury “letter” from September 2014 don’t apply, and PFE then gets full tax relief. An all-stock deal is why the accretion to PFE’s EPS is not higher.
WHAT ABOUT SHARE BUYBACKS?
This is essentialto make the math work. Already in my accretion/dilution model, I assume hefty share buybacks – but are they hefty enough? On top of the $6-8 B/yr I had already been assuming for PFE’s stand-alone buybacks, I add between $2-5B/yr coming from AGN’s cash flows (with the remaining cash flows going to support the dividend on newly-issued shares that assumes no dividend cut), and I also add $34B in buybacks coming from the cash AGN receives from selling its generics business to Teva. (I spread this evenly over the first two years post deal closure.)
Summed, this is currently $91B in buybacks over a 5-year period. A big and important question is this: could PFE do even more? It does have a trapped pile of cash overseas, and once it “inverts” it will be able to access this without as much of a tax burden. If I I have to assume an additional $20B in buybacks over 5 years (bringing the total from $91B to $111B), my average EPS accretion rises from 8% to 13% (with out-year accretion of 20%), keeping all else equal.
WILL BRENT SAUNDERS RUN THE NEW COMPANY?
This often comes up as a natural succession plan, but rarely, if ever, has PFE taken outside talent and immediately put them in charge of the company, at least in the CEO spot. I think a better question is this: if Saunders makes $100M+ on the transaction, would he even want to run a big, messy global drug company, with all of the headaches it entails? Or, would he rather move onto something a little leaner and meaner? PFE has said a split in 2017 might get pushed back further if a big M&A transaction occurred. If so, does Saunders sit idly by until 2018?
My belief is that Saunders is not likely to block a deal if he isn't promised the CEO spot
Read more: Pfizer - Allergan: Will This Deal Happen? (PFE,AGN) http://www.investopedia.com/article...r-allergan-will-deal-happen.asp#ixzz3q9ehekZM
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