Takeda and Shire: A Pricey Marriage

A month of back-and-forth has resulted in a Takeda (TKPHF -2.83%) and Shire Plc (NASDAQ: SHPG) striking a deal to form the eight biggest drugmaker in the world. The merger's $62 billion cost, however, could be a problem, especially if it dings Takeda's credit rating.

In this clip from The Motley Fool's Industry Focus: Healthcare, analysts Kristine Harjes and Todd Campbell break down the details of this deal.

A full transcript follows the video.

This video was recorded on May 9, 2018.

Kristine Harjes: We have a couple of quick updates for you. For those who have been following along with Industry Focus: Healthcare, you know that we covered previously Takeda potentially buying Shire. This is a Japanese pharmaceutical company, Takeda, looking to buy Dublin-based Shire. We covered it on April 4th. If you missed that episode, now we have the update that, yeah, this is happening.

Todd Campbell: Yeah. There was a little bit of back-and-forth here. Takeda went to Shire after they indicated that they have some interest, and Shire rejected one offer and then rejected another offer, and then eventually just sent a team of people to Japan to try to see if they could hammer something out. And in the interim, was it Allergan, Kristine? Another company popped up their head for like a day and a half and said, "Hey, we might kick the tires, too!" And maybe, when that fell apart, Shire's board said, "You know what, our best option is Takeda." They've accepted the deal now. It's a $62 billion deal. It creates a company with $30 billion in annual revenue. It's a very interesting deal, because it's creating a company that really, Kristine, could be one of the fastest-growing of the big pharmas you can invest in worldwide.

Harjes: And it would be big. This would be the world's eighth-largest drug maker. It certainly gives Takeda a lot more international reach, particularly in the U.S. and the E.U. About two-thirds of Shire's sales are in the U.S. market, which is an extremely lucrative market, so I can see why Takeda's interested here. It also adds to their gastro and their neurosciences lineup.

But, shareholders have not been happy about this. I think a large part of that is because A, it's expensive, and B, they're borrowing money to finance it. What that does to their ratings and their balance sheet is to be determined. But, I do want to point out that just today, Moody's actually downgraded Takeda, and they stated that the downgrade was reflective of their previous debt levels -- meaning, not even with this news of how they plan on financing an acquisition of Shire -- and that they will need to reevaluate if the deal goes through as proposed. So, a lot of interesting stats in that Moody's downgrade, looking forward to what would actually happen when and if Takeda does go through with this. Of course, even though we still need to see if the shareholders of both companies approve it, it's looking pretty likely that this will close in about early 2019.

Campbell: And, just some accounting, Kristine. If you happen to be an owner of Shire and you're like, "OK, the deal got done, and it's worth this many billions, what does that really mean for my shares?" You'll get $33 in cash, and then you can either get 0.839 shares in the merged company, or 1.678 Takeda ADS for every Shire share you own. So, you have to decide whether or not you want the cash, and then, if you want the Takeda shares in the trade in Japan or if you want the ADS and go from there.

What's interesting, you mentioned it's the eighth-biggest biopharma after this deal. I'd mention, the other seven before it are probably much more widely owned than Takeda. It will be interesting to see whether or not institutions start adding more shares in Takeda if the deal gets done. Then, of course, like you said, we're going to see what happens with the dividend and the ratings, because with this much of a debt level, it could be that you're not going to get the dividend increases that we've recently seen out of the company.

Harjes: That's a great point. Right now, they're paying out a 3.42% dividend, which is pretty meaty, and I'm sure there'd be plenty of shareholders who would be upset if they were to end up cutting that.