Who knew baby formula was so desirable in emerging markets? Pfizer
Nestle won. Danone lost. But the losers would also seem to include Abbott Labs
For Pfizer, it looks like a solid deal. We already knew the pharmaceutical giant was going to unload the nutrition business; the only question was how. An IPO like Bristol-Myers Squibb
Pfizer plans to repurchase shares or "invest in other business-development opportunities" with the proceeds of the deal, which is expected to close in the middle of next year. The math works for repurchasing shares.
Earnings before interest, tax, depreciation, and amortization for the division were reportedly about $600 million. If we apply Pfizer's tax rate of 20% of operating income, the sale would knock $480 million off its 2011 earnings -- likely substantially less, as depreciation and amortization of expenses would lower that further. To keep the same earnings per share in this worst-case scenario, Pfizer would have to repurchase 374 million shares at the current cost of $8.4 billon. It's hard to know what kind of taxes it'll have to pay on the $12 billion sale, but considering this is a worst-case scenario, it looks like the transaction will help the bottom line if Pfizer uses the proceeds to repurchase shares.
Of course, there's always the option to "invest in other business-development opportunities," which hopefully means buying biotechs or licensing drugs and not another Wyeth-sized acquisition. Pfizer's shares aren't dirt cheap at the moment, and while repurchasing shares does have the added benefit of lowering the cash required for dividends, I have to think there are biotechs out there with potential to add more to earnings in the long term than repurchasing shares.
Of course, Pfizer still has its animal health business to dispose of, so maybe there will be cash for both.
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