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After announcing that it was going to divest itself of its animal health division, we now know how Pfizer (NYSE: PFE ) plans to do it: an IPO of a minority stake of the division that will be called Zoetis.
The decision to spin off the division rather than sell it like Pfizer did with its nutrition business isn't a big surprise. Animal health products tend to be individual niches -- a pig vaccine against a specific virus, for instance -- with each niche having just a few players. Selling the division in one piece would likely have resulted in the acquirer having to divest of products to satisfy the antitrust regulators.
When Pfizer purchased Wyeth, which created the current animal health division, it had to sell some of the animal health assets to Boehringer Ingelheim and Eli Lilly (NYSE: LLY ) . At a certain size, the divestures become impossible to perform and still have the deal make sense. Merck (NYSE: MRK ) and Sanofi's (NYSE: SNY ) deal to bring their two animal health divisions together was evidently plagued by the same issue.
Only a company with little or no animal products would be able to buy it without a regulator headache. And then where would the cost savings be to justify a price higher than Pfizer thinks it can get in the open market?
I like the structure of the divesture. An IPO of a minority stake of the division makes more sense than a spinoff where every investor gets a share in the new company. Many investors aren't holding Pfizer because of the animal health division, and the IPO will allow those that truly want to own it to buy shares while bringing in some cash to Pfizer for drug-related acquisitions. At some point down the line, Pfizer can sell its remaining stake or allow shareholders to exchange Pfizer shares for shares in Zoetis like Bristol-Myers Squibb (NYSE: BMY ) did with Mead Johnson Nutrition.
We'll have to wait to see the financials on Zoetis before we'll know whether it's a buy, but investors can only hope it performs as well as Mead Johnson, a three-bagger since it went public three and a half years ago.
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