4th Time Not (Yet) the Charm for Pfizer

Pfizer (NYSE: PFE  ) is certainly not letting AstraZeneca (NYSE: AZN  ) slip away without a good fight. While Pfizer has been on a charm offense on both sides of the ocean trying to convince politicians that the deal is a legitimate business combination and not a cost-cutting tax dodge, the company has also stepped up its financial consideration to AstraZeneca shareholders. With AstraZeneca's board rejecting the latest and according to Pfizer the "final" offer, it remains to be seen if the international charm offensive can win over enough AstraZeneca shareholders to lead them to put pressure on their board to come to the negotiating table.

The latest offer
Pfizer's latest offer is a 3% improvement on stated headline value; GBP 55/share versus GBP 53.50/share. Pfizer's latest offer also includes a bigger cash component, with the specifics being 1.747 shares of Pfizer for each AstraZeneca share and GBP 24.76/share in cash. This deal ups the cash value by GBP 8.78/share and increases the cash component of total deal value to 45% (from 33%).

This deal still allows Pfizer to structure this deal as a tax inversion, and I would also note that it still provides some "wiggle room" to increase the deal value if necessary (AstraZeneca shareholders have to own 20% of the combined company's shares to qualify for a tax inversion).

Is anything ever really "final"?
Acquirers will often posture and pose to put more pressure on the target company's board, so it remains to be seen whether this is truly Pfizer's final offer for AstraZeneca. The company has been trying to acquire the large UK-based Big Pharma company since the beginning of the year, and the latest offer is the fourth offer for the company.

Pfizer has said that it will not launch a hostile offer for the company and further claims that this is its last and final offer. Given the rules regarding takeover proposals in the UK, AstraZeneca has to accept the deal by May 26th or enter in substantive discussions with Pfizer or Pfizer is barred from making another offer for six months.

It remains to be seen whether Pfizer means what they say that this is its final approach. If Pfizer really wants a tax inversion deal, there aren't many other options (GlaxoSmithKline and Bayer would be large enough, Teva, Valeant, and Merck KGaA would not, and Sanofi would likely be unattainable given French resistance to the sale of "national champions").

Even if Pfizer could find other deals suitable for a tax inversion, strategic overlap would be more challenging. I continue to believe that the AstraZeneca deal is motivated in part by the target's strong assets in immuno-oncology and, to a lesser extent, its emerging market presence and respiratory drug assets. Given how recent pipeline updates have been favorable for AstraZeneca's immuno-oncology pipeline, I believe it is fair to say that there's strategic value here that Pfizer won't find elsewhere.

AstraZeneca's board playing a risky game
AstraZeneca has said that Pfizer needs to offer GBP 59 a share before the board will consent to active negotiation and consideration of a merger. Pfizer could go that high and still probably extract value from the deal, but it gets a lot more challenging and risky. Simply put, AstraZeneca wants to capture full value for its shareholders and make Pfizer take on the risk of building/recognizing value from the deal.

It's worth asking if AstraZeneca is overplaying its hand. These shares have never traded close to the $92/share implied value of Pfizer's bid and the latest offer is a little more than 50% better than AstraZeneca's price before word of Pfizer's interest began to circulate. It's certainly true that AstraZeneca's immuno-oncology assets have garnered more, and well-earned, attention since the beginning of this year, but its hard to say that Pfizer's bid isn't reasonable even if it may not be a full-value offer.

Given that AstraZeneca's shares are down about 10% after this latest rejection, and not trading all that close to the implied value of Pfizer's bid, it seems the Street has its doubts about AstraZeneca's value on a stand-alone basis. This may incite some shareholders to push AstraZeneca's board to reconsider, but there isn't much time for any sort of "organized resistance" on the part of the AstraZeneca's shareholders.

The bottom line
I like AstraZeneca on a stand-alone basis, but the Pfizer bid is (or was) a good chance to maximize risk-adjusted value. AstraZeneca could become a significant player in oncology all on its own, but there is real execution risk. For Pfizer's part, there are few alternatives that can offer similar cost synergies, tax advantages, and complementary R&D assets, so perhaps it's worth sharpening the pencils one last time to see whether a deal can work on AstraZeneca's terms. By the same token, given the history of megamergers in Big Pharma failing to deliver on all of their promises, Pfizer would be wise to make sure they don't pay top dollar for a transaction that has execution risks of its own.

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