An Animal of an IPO

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.

David Gardner and his team at Rule Breakers are always on the hunt for multibagger returns. They reveal their recent health care pick and why they like it in the Fool's free report: "Discover the Next Rule-Breaking Multibagger."

Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Pfizer. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1906372, ~/Articles/ArticleHandler.aspx, 8/21/2014 5:54:13 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement